Certain non-government employees have been covered under the payment of Gratuity Act, 1972 by the Central Government and thus these non-government employees are required to pay gratuity as per the provisions of Gratuity Act, 1972. An employee who works in such organisations can be called as “Covered employee”. Any gratuity received by such an employee shall be exempt to the extent of least of following 3 amounts
15 days salary (7 days in case of employees working in seasonal factories) for each completed year of service or part thereof in excess of six months on the basis of monthly salary last drawn;
Notified limit 10,00,000 [ 3,50,000 upto 24-5-2010] —Notification No. SO. 1217(E) dated 24-5-2010.
Gratuity actually received by the employee
and balance shall be taxable.
Taxable Gratuity = Gratuity received — Exempt
Important Notes :
- Employees covered under Payment of Gratuity Act, 1972.
Payment of Gratuity Act, 1972 applies to the employees or workers covered under this Act.
Definition of Employee or workers covered under this Act U/s 2(e).
Employee means any person (other than an apprentice) employed on wages, in any establishment, factory, mine, oilfield, plantation, port, railway, company (or) shop, to do any skilled, semi-skilled, or unskilled, manual, supervisory, technical (or) clerical work, whether the terms of such employment are express (or) implied and whether or not such person is employed in a managerial (or) administrative capacity, but does not include any such person who holds a post under the Central Government (or) a State Government and is governed by any other Act (or) by any rules providing for payment of gratuity.
(2) Calculation of Length of Service/Service Period.
While calculating length of service, period exceeding 6 months is to be taken as full year (i.e., one year).
For example (a) Service period of 26 years and 7 months shall be taken as 27 years.
(b) Service period of 26 years and 6 months shall be taken as 26 year.
Thus, part of the year upto 6 months is to be ignored. In case employee has worked with more than one employer but is receiving gratuity only from present employer, his total service, i.e., from all previous employers from whom he has not received any gratuity, shall be counted.
(3) How to calculate 15 days salary ?
(a) In case of monthly rated employees.
15 days salary is to be calculated on the basis of monthly salary last drawn. Here, month is to be taken as of consisting of 26 days (maximum number of working days in a month) and hence monthly salary last drawn shall be assumed to be of 26 days and hence 15 days salary shall be calculated as follows :
15 days salary = Monthly salary last drawn x 15 days
(b) In case of piece rated employees.
15 days salary/wages shall be calculated on the basis of average of the total wages/salary of a period of 3 months immediately preceding his retirement. Wages for overtime period are to be ignored.
(4) Meaning of Salary.
‘Salary’ means salary last drawn by the employee and it also includes dearness allowance but does not include bonus and other allowances.
Thus, Salary = Basic Salary + D.A. (whether enters or not)
(5) Whole life exemption limit.
The notified exemption limit of ` 10,00,000 is a whole life exemption limit for an employee. It can be explained as follows
(a) If employee receives gratuity for the 1st time in his life.
While calculating exemption, the notified limit of ` 10,00,000 shall be applicable and he shall be granted exemption in respect of least of 3 limit discussed earlier.
(b) If employee receives gratuity for the Second/Third or subsequent times.
While calculating gratuity exemption on subsequent occasion, the notified exemption limit to be taken shall be as follows :
Maximum Notified Limit of ` 10,00,000 — (less) Exemption claimed in the past.
(6) Gratuity received during service.
In case gratuity is received by an employee during the continuance of service with the same employer, it shall be fully taxable in the hands of such employee. It is so because the exemption prescribed U/s 10(10) is only for ‘Death-cum-retirement gratuity’. However in case an employee gets retired from an employer but has been reemployed by the same employer, exemption shall be granted to employee in respect of gratuity received on such retirement.
(7) Receipt of gratuity simultaneously from two or more employers.
In this case, exemption shall be allowed in respect of all such death-cum-retirement gratuities subject to overall single maximum limit of ` 10,00,000.
(8) Gratuity Exemption only in case of employer-employee relationship ‘OR’ Employer-ex-decreased employee relationship.
The exemption of gratuity as provided U/s 10(10) is available in the following cases only
- If gratuity is received by an employee on leaving job, or
- by the legal heirs of an employee after the death of such employee.
Thus, where gratuity is received by an agent from his principal, no exemption shall be available U/s 10(10). Similarly, if gratuity is received by a director (who is not an employee of the company) from the company, no exemption to such director in respect of gratuity so received.
(9) Relief U/S 89(1).
In respect of taxable gratuity included in salary income of any previous year, the employee is entitled to claim relief U/S 89(1) provided employee has got gratuity after completing service for 5 years or more.
Calculation of 15 days salary for each year of service of a piece rated worker
Find out the salary of piece rated worker/employee for a period of 3 months immediately preceding his retirement. Wages for overtime period are to be ignored.