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Under Income Tax Act
Gratuity is a benefit given by the employer to employees. A recently approved amendment by the Centre has increased the maximum limit of gratuity. Now it is tax exempt up to Rs 20 lakh from the previous ceiling of Rs 10 lakh, which comes Section 10(10) of the Income Tax Act. The CBDT Notification no. S.O. 1213(E), dated 8 March 2019, clarified that the exemption limit of Rs 20 lakh would be applicable to employees in the event of retirement or death or resignation or disablement on or after 29 March 2018.
Let us understand the impact of this amendment in comparison with the previous provisions.
Gratuity is a monetary benefit given by the employer, but not paid as part of the regular monthly salary. The provisions of gratuity are governed by the Payment of Gratuity Act, 1972, and it is given on the occurrence of any of the following events.
Every individual – working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months – is entitled to gratuity.
Once the Act becomes applicable to an employer, even if the number of employees goes below 10, gratuity is still applicable.
Calculation of the amount of gratuity exempted from tax
The least of the following is exempt from tax:
Let us understand this through an illustration: The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to receive a gratuity of Rs. 11 Lakhs. He has been in employment for the last 19 years and 7 months.
|Sr. No.||Particulars||Previously||As Amended|
|1||Last drawn salary (Basic + DA)||1 lakh||1 lakh|
|Number of years of employment||20 (will be rounded off)||20 (will be rounded off)|
|Gratuity||1,00,000*20*15/26 = 11,53,846||1,00,000*20*15/26 = 11,53,846|
|2||Maximum exemption allowed||10 lakhs||20 lakhs (as amended)|
|3||Gratuity actually received||11 lakh||11 lakh|
|Amount of exemption (least of the above)||10 lakh||11 lakh|
|Taxable gratuity||1 lakh||–|
Points to note:
There is no law that restricts an employer from paying gratuity to his employees, even if the organization is not covered under the Payment of Gratuity Act. The amount of gratuity payable to the employee can be calculated based on half month’s salary for each completed year.
Calculation of amount of gratuity exempted from tax
The least of the following are exempt from tax:
Gratuity exemption for such employees would be computed as follows:
Raghav has been in employment for 25 years and 2 months. The average salary for the last 10 months is Rs. 90,000. The actual gratuity received by him is Rs. 11 Lakhs.
|Sr. No.||Particulars||Amount (Rs.)|
|1||Average of last 10 month’s salary||90,000|
|Number of years of employment||25 (will be rounded off)|
|Gratuity||90,000*25*1/2 = 11,25,000|
|2||Maximum exemption allowed||10 lakhs|
|3||Gratuity actually received||11 Lakhs|
|Amount of exemption (least of the three)||10 Lakhs|
|Taxable Gratuity||1 Lakh|
Points to note:
Gratuity paid by the government to government employees is fully exempt from tax.
The impact of the amendment is evident from the example. A hike in the ceiling limit of maximum exemption helps reduce the taxable gratuity amount. This amendment is going to benefit those earning higher salaries in the short run. However, if you have a long time left before your retirement, this amendment will benefit most employees.
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