Introduction

The amount paid by an employer to an employee for services rendered in the company is known as Gratuity. However, it is paid only to employees who complete 5 or more years with the company. It can be given as a token of appreciation by the employer to the employee for services offered by the company.

Group Gratuity plan can be taken by an employer from an insurance provider or he may offer it to his employees from his pocket. Annual contributions are then paid by the employer to the insurance provider for this. The employee too can contribute to his gratuity amount. According to the clauses in the group insurance scheme, it is paid by the insurance company.

Payment of Gratuity Act, 1972

The payment of Gratuity Act was passed in the year 1972 and covers employees engaged in mines, factories, oil fields, plantations, companies, ports and other such establishments which have more than ten employees. It is different from the provident fund as it is paid by the employer with/without any contribution from the employee.

Eligibility

  1. An employee should be eligible for superannuation
  2. An employee retires
  3. An employee resigns after working for 5 years with a single employer
  4. An employee passes away or suffers disability due to illness or accident

The Formula for Calculation of Gratuity Amount:

The amount of gratuity is based upon the number of years worked in the company and the salary last drawn.

If,

N = number of years of service in a company

B = last drawn basic salary plus DA

then,

Gratuity = N*B*15/26

For example, the last drawn salary (basic plus DA) of Mr. Manoj, for example, is Rs. 70,000 and he have worked for 35 years. According to the formula, the amount is Rs. 14,13,462 and he have received this amount as the gratuity. For tax purposes, Rs. 10 lakh would be considered as exemption limit as it is the lowest of the three factors. So Mr. Manoj will have to pay tax on Rs. 4,13,462  (Rs. 14,13,462  – Rs. 10 lakh).

Taxation Process of Gratuity:

The taxation process for gratuity depends upon the employee who is receiving the amount. Two cases arise for the calculation of tax on it:

  1. Government Employee Receiving Gratuity Amount:

In case any employee is working under the state government, central government or local authority then, the amount is fully exempt from Income Tax.

  1. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is Covered by Payment of Gratuity Act:

In case the employer is covered under the Gratuity Act and the amount is received by an employee then, the following amount is exempt from tax.

  • The last drawn salary of the individual as per 15 days salary
  1. Any Other Salaried Individual Receiving Gratuity Amount from an Employer who is not Covered by Payment of Gratuity Act:

In such a case the least of the following three amounts are exempt from tax.

  • 10,00,000
  • It actually received by employee
  • Half month’s salary for every year of service that the employee has completed with the employer

For any help on ITR Filing feel free to consult the tax experts at LegalRaasta. You can file ITR yourself via our ITR software or get CA’s help on filing income tax return. You can also use the option of Business ReturnBulk Return or Revised Return Filing.