RECENT enhancement in limits of gratuity payment has generally been cheered by employees although some worry that these limits for nongovernment employees are applicable prospectively and not retrospectively. A lot of queries have been received as to the taxability or otherwise of the gratuity received by different category of employees. In this context, it is important to note that all gratuity received by an employee is not exempt from tax per se, except up to limits specified under the provisions of the Income-Tax Act, 1961. Therefore, it is important to take a note of the relevant tax provisions in this regard.
Government Employees
The government had earlier enhanced the limits up to which gratuity could be received by the employees covered under the government pension/gratuity scheme, in line with the recommendations of the Sixth Pay Commission. As per the provisions of the I-T Act, 1961, any death-cum-retirement gratuity received under the Pension Rules/Scheme of the Central government or state government or Regulations applicable to the members of defence services, is not taxable.
Gratuity Received Under The Gratuity Act
In respect of employees receiving gratuity under the payment of the Gratuity Act, 1972, any gratuity received to the extent that it does not exceed an amount calculated in accordance with the provisions of the Gratuity Act, is not taxable. Recently, the government had enhanced the limit for payment of gratuity under the Gratuity Act from Rs 3.5 lakh to Rs 10 lakh. The exemption limits in this case would apply accordingly.
Other Employees
In respect of employees receiving gratuity other than under the government pension/gratuity scheme and also other than under the Payment of the Gratuity Act, the computation mechanism in respect of exemption limits has been specified under the I-T Act. It is pertinent to note that recently the Central Board of Direct Taxes (CBDT) has issued a notification enhancing the overall tax exemption limit to Rs 10 lakh. Though this is a welcome step, in case of other employees, the following points merit attention while claiming exemption: The gratuity received by an employee is not taxable if it is received on his retirement, his becoming incapacitated prior to such retirement, termination of employment or if such gratuity is received by his widow, children or dependants on his death.
Further, such gratuity does not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for 10 months immediately preceding the month in which such retirement/death etc takes place, subject to the limits prescribed by the Central government.
