The Payment of Gratuity Act, 1972, applies to factories and other establishments employing 10 or more persons. On completion of five years service, the employees are entitled to payment of gratuity at the rate of 15-day wages for every completed year of service or part of it in excess of six months subject to a maximum of Rs 3.5 lakh. However, gratuity is considered an income and the employee who receives it is liable to pay tax on it. However, gratuity up to Rs 3.5 lakh is exempt from tax under the provisions of Section 10(10) of the Income Tax Act, 1961. As per Sixth pay commission the maximum limit of Rs. 3.5 lakh is extended to Rs. 10 lakh for both government employees and private sector employees. Normally the gratuity is received by an employee at the time of his/her retirement or resignation or the amount received by the legal hires of an employee at the time of his/her death.
Calculation of gratuity is Basic Salary + D.A x Number of Years completed x 15 divided by 26
Basic Salary and D.A is the Last drawn basic and D.A. One month is considered as 26 days. Six months or is considered as full completed year, means if an employee continued his service in an institution for 10 years and 7 months will be considered as 11 years for the calculation of gratuity. If it is only 10 years and 5 months 20 days will be considered as 10 years only,
Tax implication of gratuity
Any death cum retirement gratuity received by a government employee or a Local Authority employee is exempted from income tax. But for any other employees least of the following is exempted.
15 days’ salary, based on the last drawn salary, for each completed year of service, or
Rs. 10,00,000 (Rs. 3,50,000 before May 24, 2010); or
The gratuity actually received.
Gratuity is a useful benefit for employees when retire after long service and a non taxable income (normally)
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