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Gratuity [Section 10(10)]

Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:

(a)      the employee himself at the time of his retirement; or

(b)      the legal heir on the event of the death of the employee.

Gratuity received by an employee on his retirement is taxable under the head "Salary" whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head "Income from other sources". However, in both the above cases, according to section 10(10) gratuity is exempt upto a certain limit. Therefore, in case gratuity is received by employee, salary would include only that part of the gratuity which is not exempt under section 10(10).

A. Death-cum-retirement gratuity received by Government servants [Section 10(10)(i)]

Section 10(10)(i) grants exemption to gratuity received by Government employee (i.e., Central Government or State Government or local authority).

B. Gratuity Received by a Non-Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]

Minimum of the following 3 limits:
(1)      Actual gratuity received, or
(2)      15 days salary for every completed year, or part thereof exceeding six months 7 days salary for each season in case of employee in seasonal establishment; or
(3)    ₹. 10,00,000

Meaning of Salary:
(i)         Basic salary plus dearness allowance.
(ii)        Last drawn salary. Average salary for preceding 3 months in case of piece rates employees
(iii)       No. of days in a month to be taken as 26

C. Any other Employee

Minimum of the following 3 limits:
(1)      Actual gratuity received
(2)      Half months average salary of each completed year of service.
(3)      ₹. 10,00,000

Meaning of Salary:
(i)         Basic Salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.
(ii)        Average salary of last 10 months preceding the month in which event occurs.
(iii)       Only completed year of service is to be taken
.

  1. Where an employee had received gratuity in any earlier year(s) and had claimed exemptions under section 10(10) in respect of the gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is `10,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.
  2. The words "completed service" occurring in section 10(10) should be interpreted to mean an employee's total service under different employers including the employer other than the one from whose service he retired, for the purpose of calculation of period of years of his completed service, provided he was not paid gratuity by the former employer. CIT v P.M. Mehra (1993) 201 ITR 930 (Bom).
  3. Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head "Salaries" because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. In this case, however the assessee can claim relief under section 89.
  4. The CBDT vide its instruction in F. No. 194/0/73-IT, dated 19.6.1973 has clarified that the expression "termination of employment" would cover an employee who has resigned from the service.
Index of Exempted Incomes (Section 10)
 

Related Topics.... Exempted Incomes :

List of Exempted Incomes (Tax-Free) Under Section-10
Section-wise Index of Exempted Incomes Under Section 10
Gratuity Received by a Non-Government Employee covered by Payment of Gratuity Act, 1972 [Section 10(10)(ii)]
Gratuity [Section 10(10)]
Commuted value of Pension Received is Exempt from Tax [Section 10(10A)]
Amount received as Leave Encashment on Retirement [Section 10(10AA)]
Retrenchment Compensation received by Workmen [Section 10(10B)]
'Retirement Compensation' from a Public Sector Company or any other Company is Exempt from Tax [Section 10(10C)]
Any sum received under a Life Insurance Policy [Section 10(10D)]
Exemption in respect of Amount Received from any Provident Fund (PPF/SPF/RPF/URPF) [Section 10(11), 10(12)]
Payment from Superannuation Fund [Section 10(13)]
House Rent Allowance-HRA [Section 10(13A) Read with Rule 2A]
Any Allowance given for meeting Business Expenditure [Section 10(14)]
Interest Incomes [Section 10(15)]
Income of certain Funds of National Importance, Educational Institutions and Medical Institutions [Section 10(23C) and Rules 2C and 2CA] :
Income of Core Settlement Guarantee Fund [Section 10(23EE)]
Any income of a Corporation established for Ex-Servicemen [Section 10(26BBB)]
Certain Interest to Non-Residents [Section 10(4)]
Leave Travel Concession or Assistance (LTC/LTA) [Section 10(5)]
Salary or Remuneration to Foreign Employee and Non-Resident Member of Crew [Section 10(6)]
 
 
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