GRATUITY

 Gratuity

Gratuity is a voluntary payment made by an employer in appreciation of services rendered by
the employee. Now-a-days, gratuity has become a normal payment applicable to all employees.

In fact, the Payment of Gratuity Act, 1972 is a statutory recognition of the concept of gratuity.
Almost all employers enter into an agreement with employees to pay gratuity.

Exemption in respect of Gratuity [Section 10(10)]
Its treatment is discussed below:

1. Retirement gratuity received under the Pension Code Regulations applicable to members
of the Defence Service is fully exempt from tax.

2. Central / State Government Employees: Any death cum retirement gratuity is fully exempt from tax.

3. Non-government employees:
(a) Non-government employees covered by the Payment of Gratuity Act, 1972
Any death-cum-retirement gratuity is exempt from tax to the extent of least of the
following:

      (i) ` 10,00,000

      (ii) Gratuity actually received

      (iii) 15 days’ salary based on last drawn salary for each completed year of service or part
            thereof in excess of 6 months

Note: Salary for this purpose means basic salary and dearness allowance. No. of days in a month for this purpose, shall be taken as 26.

(b) Non-government employees not covered by the Payment of Gratuity Act, 1972
Any death cum retirement gratuity is exempt from tax to the extent of least of the
following:

   (i) ` 10,00,000

   (ii) Gratuity actually received

   (iii) Half month’s salary (based on last 10 months’ average salary immediately preceding
        the month of retirement or death) for each completed year of service (fraction to be
        ignored)

Note: Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.