IT IS rightly said that patience is not only a virtue but can also be very rewarding in financial terms. In case you are changing jobs or retiring, you may be eligible for gratuity from your employer, if the terms of your employment so state.
Under the Income-Tax Act, 1961, (the Act), employees receiving gratuity are categorised as: Government employees, non-government employees covered under The Payment of Gratuity Act, 1972 (Gratuity Act) and non-government employees not covered under the act.
Meaning of gratuity: As per the dictionary, gratuity is the money that you give somebody who has provided a service for you; money that is given to employees when they leave their job.
Broadly, as per the Gratuity Act, gratuity is payable to employees by any establishment in which 10 or more people are employed on any day of the preceding 12 months.
Who is eligible for gratuity: Under the Gratuity Act, an employee who has rendered continuous service for not less than five years with his/her employer at the time of termination from employment is eligible for gratuity. In addition, termination of employment includes superannuation, retirement, resignation, death or disability due to an accident or disease. The five-year requirement is not necessary in case of death or disability.
How much gratuity is payable: As per the Gratuity Act, half month's salary for each completed year of service is payable as gratuity. Here, salary for the purpose of gratuity includes basic salary and dearness allowance, if the terms of employment so provide, months.
Who is eligible for gratuity: Under the Gratuity Act, an employee who has rendered continuous service for not less than five years with his/her employer at the time of termination from employment is eligible for gratuity. In addition, termination of employment includes superannuation, retirement, resignation, death or disability due to an accident or disease. The five-year requirement is not necessary in case of death or disability.
How much gratuity is payable: As per the Gratuity Act, half month's salary for each completed year of service is payable as gratuity. Here, salary for the purpose of gratuity includes basic salary and dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.
In case of employees earning monthly wages, a month is to be construed as comprising 26 days instead of 30/31 days.
Taxability of gratuity: The amount that you receive as gratuity is added to your income for that year under the head "Income from Salary" and an exemption in respect of the same is available in accordance with Section 10(10) of the Act.
For government employees: The gratuity amount paid to employees of the Union government, state governments, local authorities or defence services in accordance with the prescribed schemes/rules, is completely tax free.
For non-government employees covered/not covered under the Gratuity Act: Gratuity would be exempt to the least of amount of gratuity paid, or, 15 days' salary for every completed year of service, or, Rs 10 lakh.
Salary in case of establishments covered under the Gratuity Act is the last drawn salary of the employees, while for establishments not covered under the Gratuity Act, it is calculated on the basis of 10 months' average salary lastity amount paid to employees of the Union government, state governments, local authorities or defense services in accordance with the prescribed schemes/rules, is completely tax free.
For non-government employees covered/not covered under the Gratuity Act: Gratuity would be exempt to the least of amount of gratuity paid, or, 15 days' salary for every completed year of service, or, Rs 10 lakh.
Salary in case of establishments covered under the Gratuity Act is the last drawn salary of the employees, while for establishments not covered under the Gratuity Act, it is calculated on the basis of 10 months' average salary last drawn by the concerned employees.
An important point to remember is that if gratuity is received in any earlier year and the whole or any part of the amount was not added to the taxable income in that year, then the amount exempt from income tax shall not exceed the specified limit and such limit would be reduced by the amount received in the earlier year(s). For example, if the exemption limit of gratuity received in the present year is Rs 10 lakh, and in an earlier year, you had received Rs 2 lakh, which was not considered as taxable in that year, the limit of gratuity received in the present year to be considered as exempt would be reduced to Rs 8 lakh (Rs 10 lakh less Rs 2 lakh).
It may be recalled that prior to May 24, 2010, the maximum amount of gratuity that was exempt from tax was Rs 3.5 lakh.
To sum up, gratuity is a benefit that adds on to the tax-free income of the individual. The enhanced exemption effective from May 24, 2010, is a welcome move because it ensures a higher take-home pay for employees, which is important especially at the time of retirement.
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