According to Indian Income Tax Act, any gratuity received by the employee, is exempt from his/her income as under:-
- Death-cum-retirement gratuity received by any employee of Central Government, Local Government and Local Authorities is exempt from income tax with out any limit. For example: Mr. X is the employee of Central Government. He received the gratuity for Rs.20,00,000/= (Rs. Twenty Lacs) on his retirement during financial year 2015-16. No tax shall be charges on Rupees twenty lacs.
- Gratuity received by non-government employee received under the Payment of Gratuity Act,1972, is exempt from income tax up to Rs.10,00,000/= (Rupees ten lacs only) subject to the following terms and conditions:-
- It should not exceed 15 days wages for every completed year of service.
- It should be calculated on the basis of last drawn wages.
Monthly Wages Last Drawn X 15
- 15 days wages = ———————————————————–
- Completed year of service means continuous service of one year. Part of year in excess of six months will be treated as one year for the purpose of Payment of Gratuity.
- Gratuity received by non-government employee on his retirement or on termination or becoming incapacitated or on resignation, is exempt from income tax, maximum up to 10 lacks and the same will be calculated on the basis of average salary for ten months immediately preceding months.
Illustration: (Employee Covered under Payment of Gratuity Act,1972)
Mr. Y who is non-government employee, received Rs.14 lacs as gratuity on his retirement on 15.12.15. He is covered under Payment of Gratuity Act,1972. His period of service is 38 years and 5 months. The last wage drawn by him were Rs.53,300/= per month. Calculate his taxable income from gratuity?
- Gratuity received Rs.14,00,000/=
- Amount calculated at 15 days wages for number of completed year of service
= 53300 x (15/26) x 38 = 11,68,500/=
- Maximum limit for exemption is Rs.10,00,000/=
From the above calculation it is clear that Rs.10 lacs shall be exempt from income tax and Rs.4,00,000/= shall be taxable income.
Note: Last five month shall not be treated as one year of service since it less than six months.
Illustration: (Employee not covered under Payment of Gratuity Act, 1972)
Mr. Z received the gratuity amount of Rs.13 lacs on his retirement on 15.10.16. Period of Service is 38 years. Average salary of immediately preceding 10 months is Rs.60,000/=. Calculate the taxable income of Mr. Z against the income from gratuity for financial year 2016-17.
Amount of Gratuity received Rs.13,00,000/=
Average salary Rs. 60000
Half month’s average salary for 38 years = 60000/2 x 38 = 11,40,000/=
Maximum exempted limit from gratuity Rs. 10,00,000/=
From above calculation, it is clear that Rs.3,00,000/= will be taxable income from gratuity.
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