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

As per section 10(10)(ii), exemption in respect of gratuity in case of employees covered by the Payment of Gratuity Act, 1972 will be lower of following :

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.