retirement benefits

1.Gratuity – Section 10(10)

Gratuity is a payment made by the employer to an employee for the services rendered during the period of employment by the employee. It is usually paid at the time of retirement but it can be paid before provided certain conditions are met. It applies to enterprises having 10 or more employees on a single day in preceding 12 months. And once an organisation comes under the purview of the gratuity Act, then it will always remain covered even if the number of employees falls below 10.

Gratuity can either be received by:

  1. the employee himself at the time of his retirement; or
  2. The legal heir on the event of the death of the employee.

When are you Eligible?

You will be Eligible for gratuity if you have completed minimum 5 years of Service under your employer. It is not applicable to interns or temporary employees.

Calculation of amount of gratuity exempted from tax (on Retirement):

a) In case of Government Employee : Any gratuity received by a Government employee is wholly exempt from tax. This exemption is not available to employees of statutory corporation.

b) In case of Employees covered by Payment of Gratuity Act: An amount equal to the least of the following will be exempt from tax –

  • 15/26 x Salary last drawn x No. of completed years of service or part thereof in excess of 6 months.
  • 20,00,000 (hiked up from Rs. 10,00,000 as per the amendment)
  • Gratuity actually received

Example: Last drawn salary (Basic + Dearness Allowance) of MR X was Rs.1,00,000 per month. He is entitled to receive a gratuity of Rs.11,00,000. His tenure of employment was 19 years and 9 months.

Tax exemption on Gratuity – Lower of the below three:

Sr. No. Particulars Amount  
1 Gratuity computed 15/26*1,00,000*20 = 11,53,846
2 Exemption allowance (maximum) 20,00,000
3 Actual received 11,00,000
4Amount of exemption (least of the above ) 11,00,000
5 Taxable gratuity Nil

c) In Case of Employees not Covered under the Payment of Gratuity Act :An amount equal to the least of the following will be exempt from tax –

  • ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
  • 10,00,000
  • Gratuity actually received

Important Points:

  1. Gratuity received during the period of service by any category of employees i.e. government, covered or not covered under the act is fully taxable.
  2. Gratuity received at the time of death by the legal heir of any government employee is fully exempt u/s 10(10)(i)
  3. Gratuity received at the time of death by the legal heir of employees covered or not covered under gratuity act is taxable as per the limits mentioned, when gratuity was received on retirement.

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