All gratuity received is not tax exempt despite hike in limits

   Recent enhancement in limits of gratuity payment has generally been cheered   by employees although some worry that these limits for non-government 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. Salary for this purpose includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites. Also, as per some judicial precedents, completed service would mean a total period of service whether under one employer or more.

   In case, any such gratuities are received by an employee from more than one employer in the same financial year, the aggregate amount so exempt shall not exceed the overall exemption limit. Similarly, where any such gratuities was or were received in one or more financial years, then the exempt amount claimed earlier has to be taken into account while computing the exemption at present. Caution point

   In the case of employees receiving gratuity (other than under the government scheme or under the Payment of Gratuity Act), the limits have been increased to Rs 10 lakh from the erstwhile limit of Rs 3.5 lakh. This enhanced limit is applicable to employees who retire, become incapacitated before retirement, expire or whose services are terminated on or after 24th May 2010. Therefore, gratuity in respect of earlier period would continue to be governed by the erstwhile tax exemption limits.