Friday, 20 August 2010

Gratuity Calculation and Tax Implication

The Payment of Gratuity Act, 1972, applies to factories and other establishments which are employing 10 or more persons. On completion of five years service, employees entitled to get the gratuity at the rate of 15-days' 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 an income and the employee who receives it is liable to pay tax on it, but, gratuity up to Rs. 3.5 lakh is exempt from income 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 increased to Rs. 10 lakh for both government employees and private sector employees. Normally gratuity is a lumpsum amount receivable by an employee at the time of his/her retirement or resignation or 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 are the Last drawn basic and D.A. For Gratuity purpose one month is considered as 26 days. Six months or more is considered as a full completed year. For example, if an employee continued his service in an institution for 10 years and 7 months, the service period for gratuity is considered as 11 years. If it is only 10 years and 5 months 20 days, the number of years 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.

(1) 15 days' salary, based on the last drawn salary, for each completed year of service.
(2) Rs. 10,00,000 (Rs. 3,50,000 before May 24, 2010).
(3) The gratuity actually received.

Gratuity is a benefit to all employees who have worked in an institution for a long time. It is receivable at the time of retirement. The gratuity amount can use for purchasing annuities or can invest the amount in a monthly income scheme to get a regular income after retirement.

Gratuity Calculation and Tax Implication

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  1. veterinary technician24 August 2010 at 12:49

    Keep posting stuff like this i really like it

  2. medical assistant24 August 2010 at 17:19

    Great site. A lot of useful information here. I’m sending it to some friends!