Sep 182014

GRATUITY – Taxation Issues

Income tax assumes gratuity as capital receipts and exempts gratuity receipts up to Rs 10,00,000. This means that you need not to pay tax, subject to some conditions,  for gratuity receipts up to Rs 10 Lakhs. Gratuity beyond this limit is paid by employee under ex-gratia head and always taxable.

Calculation of tax empmption:

Categorization of employees for exemption Under Section 10(10) Are:-

  • Government employee and employee of local authorities.
  • Employee covered under the Payment of Gratuity Act, 1972
  • Other employees not covered under the Payment of Gratuity Act, 1972. (Gratuity payments under this category is hardly seen and hence not discuss in this paper)

 Exempted amount should be Minimum of the Following:

i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months considering 26 days in a month
iii) Rs 10 Lakhs

How Are Gratuity Accounted for Government Company and Non-Government Company?

Government Company Non- Government Company


The Entire Amount You Get is Exempted (under Section 10(10)(i) 



Amount should be Minimum of the Following:i) Actual gratuity received
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months.
iii) Rs 10 Lakhs

(Under Act 1972)

Issues :-

-> Whether TDS is to be deducted by employer on payment of Gratuity to Employees?

Only where the Gratuity amount exceeds the Exemption Amount as calculated under section10(10) of Income tax Act, TDS shall be deducted otherwise no.

-> Whether Insurance / earmarked investment is mandatory for Gratuity Fund?

Not Mandatory, The Act does not force you to make any provision or any gratuity fund. You are to make the payment of gratuity to the eligible employee as and when is due to be paid.

-> If we show the Gratuity as Part of salary How we Manage and do Accounting?

It cannot be stated as part of salary.

-> If an employee whose gratuity is withheld pending completion of the proceedings is he entitled to interest on gratuity ?

The employee is entitled to interest also from the date of Gratuity till the payment of gratuity. Case law:- Supreme Court ruled in Y.K. Singla v. Punjab National Bank.

Practical application:-

Mr. X receives following amount in previous year:

1)       Gratuity receive 3,00,000
2)       Year of service 30 years 7 months( excess of 6 month should be taken as full year)
3)       Average salary 20000


1)        3,00,000
2)       (31 * 20,000 * 15/26) = 357692.31
3)       10,00,000

Therefore3,00,000 shall be  exempted .

Case Study:- 

Employer has resigned after working for more than 5 years. Employer signed the full and final settlement letter stating he has no dues pending from company. Full and final settlement letter does not mention anything about gratuity, Now after 3 months employee has submitted a letter claiming for gratuity. Is Employer liable to pay gratuity to employee?

Employer is liable to pay gratuity to the employee even after full and final payment, mere by signing that he/she receive all payment does not effect his /her right to claim gratuity.

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