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.
