Recent things to know about Gratuity..

   In respect of other employees, it is to be  determined whether they receive gratuity from an employer covered under the  Payment of Gratuity Act, 1972 or not. It is pertinent to note that every  gratuity payment received by an employee is not exempt from tax per se. In  this context, it is important to note the provisions of the Payment of  Gratuity Act, 1972 read with the Income Tax Act, 1961.

Payment  of Gratuity Act 

   Any gratuity received by an employee from an  employer covered under the Payment of Gratuity Act, 1972 to the extent it  does not exceed an amount calculated in accordance with the provisions of  the Gratuity Act is not taxable. Recently, the government increased the  limit from Rs 3.5 lakh to Rs 10 lakh w.e.f. 24 May 2010.

Organisations covered under Gratuity Act

   The Gratuity Act applies to every factory,  mine, oilfield, plantation, port and railway company. It also applies to  every shop or establishment covered under the Shops and Establishments  Act/regulations of a state, in which 10 or more persons are employed or were  employed on any day of the preceding 12 months. Further, it also applies to  such other shop or establishment, as the central government may prescribe. A  shop or establishment to which the Payment of Gratuity Act becomes  applicable would continue to be covered, even if the number of persons  employed by it subsequently falls below 10.

When is  gratuity payable? 

   Gratuity is payable to an employee on the  termination of employment after he has rendered continuous service for not  less than five years or such other time as prescribed in respect of the  specified industries/sectors. Termination of employment may be on account  of superannuation or retirement or resignation or death or disablement due  to accident or disease. In the unfortunate event of death or disablement,  the aforesaid time limit is waived off.

Amount  of gratuity

   The gratuity is to be computed at the rate  of 15 days of wages last drawn by the employee for every completed year of  service or part thereof in excess of six months. In case of employees  earning monthly wages, the month is reckoned to be of 26 days and  computation is to be done accordingly. Certain other computation methods are  prescribed for few specific industries/sectors. Till recently, the amount of  gratuity payable to an employee was not to exceed Rs 3.5 lakh. This limit  has been revised to Rs 10 lakh.

Gratuity received by other staff

   In case of gratuity received by employees,  other than under the Payment of Gratuity Act, the amount is not taxable to  the extent of the prescribed limits as per the provisions of the Income Tax  Act.

Caution  point 

   There was an expectation that limits of  gratuity under the Payment of Gratuity Act would be revised retrospectively  to provide parity in comparison with the enhanced gratuity received by the  government employees as per the recommendations of the Sixth Pay Commission. It is, however, important to note that these  limits have not been revised with retrospective effect. Therefore, the  enhanced limit under the Gratuity Act would only apply after the specified  date and the erstwhile limit would apply for the earlier period.