Gratuity, a retirement benefit, is simply the employer’s way of saying ‘thank you’ to the employee for rendering his continuous service to the organisation.
As per current laws under the Payment of Gratuity Act 1972, the gratuity received by government employees is tax exempted, i.e., one is not required to pay any tax on the gratuity amount.
On the other hand, for a non-government employee, the gratuity received in his entire working life is tax-free up to a maximum limit of Rs 10 lakh.
The government’s decision to raise the tax-free gratuity limit to Rs 20 lakh for non-government employees may lead to big tax savings. The decision has yet to be approved.
A) Applicability
- The Act is applicable to those establishments where 10 or more employees work on any single day in the preceding 12 months of the year.
- As per the Act, an employee is eligible to receive gratuity only if he has completed at least five years of continuous service with an organisation, without any interruption.
B) Non-Government Employees
To calculate the tax exempted amount for non-government employees, they are divided into two categories:
- Those covered under the Payment of Gratuity Act, 1972
- Those not covered under the Payment of Gratuity Act, 1972
C) Calculation of tax exempted gratuity
For the employees covered under the Act, the least of the following is exempted from tax:
a) Rs 10 lakh.
b) Actual gratuity received.
c) 15 days salary* based on the last drawn salary for each completed year of service or part thereof in excess of six months.
(Salary includes basic salary received by the employee and the dearness allowance and commission received if any)
For the employees not covered the Act, the least of the following is exempted from tax:
a) Rs 10 lakh
b) Actual gratuity received.
c) Half month’s average salary* for each completed year of service.
(Salary includes basic salary received by the employee and the dearness allowance and commission received if any)
The average salary is taken as the average of the salary of last 10 months immediately preceding the last working month.
D) Tenure of Service
The tenure for which the employee has rendered his services is based on whether the organisation is covered under the Act or not.
a) If the organisation is covered under the Act, the employee’s service tenure will be considered for a full year, provided he has worked for more than six months, but less than a year.
b) If the organisation is not covered under the Act then the tenure of the employee whose services exceeds six months, but is less than a year will not be considered as a full year.
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