Gratuity can be received by the employee at the time of his retirement
or by his legal heir in the event of death of the employee. Gratuity
received by an employee on his retirement is taxable under the head "Salary"
and gratuity received by the legal heir is taxable under the head"
Income from Other Sources".
In both the above situations gratuity upto a specified limit is exempt
under the provisions of sec.10(10) of the Income Tax Act, 1961.
For the purpose of exemption of gratuity under sec.10(10) the employees
are divided under three categories:
- Govt. employees - In the case of govt. employees the entire
amount of death-cum-retirement gratuity is exempt from tax and
nothing is therefore taxable under the head Salaries.
- Employees covered under the Payment of Gratuity Act, 1972 - The
employees covered under the Gratuity Act who receive gratuity have
been given exemption which is the minimum of the following amounts.
Gratuity received in excess of the minimum of the amounts mentioned
below is included in the gross salary for the purposes of taxation.
- The amount of gratuity actually received.
- Fifteen days' salary (7 days in the case of seasonal
employment) for every completed year of service provided the
employment is more than six months.
- Other employees - In the case of other employees the gratuity
received or receivable on his retirement or on his becoming
incapacited prior to such retirement or termination of his
employment or any gratuity received by his heirs is exempt to the
extent of the minimum of the following amounts. The amount received
in excess of the sums mentioned below is included in the gross
salary of the employee for the purposes of taxation.
- Actual amount of gratuity received.
- Half month's average salary for every completed year of
service. (Average salary means the average of the salary drawn
by the employee for 10 months immediately preceding the month in
which he retires)
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