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1) It is the payment received from the company by the employee in appreciation of past service.

Hence it is given out of love and regard for good work done by employee during job

 

2) It may be received on retirement by the employee himself or on death, by his/her legal heir .

 

Gratuity - Taxability Of Retirement Benefits

How to Calculate Exemption

For Central Government /State Government Employees/Member of Defence Service covered under Pension Code

Fully Exempt

 

For Other Employees

 There can be 2 cases

Covered under Payment of Gratuity ActNot Covered under Payment of Gratuity Act
Least of 3 is exemptLeast of 3 is exempt

1. Rs 1000000

1. Rs 1000000

2.Actual Gratuity Received

2.Actual Gratuity Received

3.15/26 days Salary for each completed year

of Service and part greater than 6 months

3,Half Month (15/30) Salary for

completed year of Service

 

  
Month Consists of 26 days,so we take 15/26Month Consists of 30 days,so we take 15/30 or 1/2
Gratuity calculated for Part of month greater than 6 months to be iGratuity NOT calculated for part of months (only completed year to be taken)

 Salary means

Basic+DA only

 Salary means

Basic+DA forming part of retirement benefits+Commission Charged as a % of turnover 

 

 

 

Note :−

1)Note: Only gratuity received at the time of retirement or death is exempt as above.f gratuity received during employment it is fully taxable

2) If gratuity received from more than 1 employer then Rs.1000000/- is the total limit for all the employers.

3)The amount worked under previous employers to be added for calculating total period of service

This is done only if employee has not claimed exemption earlier .

 

Question

Mr. Ravi retired on 15.6.2015 after completion of 26 years 8 months of service and received gratuity of Rs 6,00,000. At the time of retirement his salary was:

ParticularsAmount
Basic salaryRs 5,000 p.m.
Dearness AllowanceRs 3,000 p.m. (60% of which is for retirement benefits)
Commission1% of turnover (turnover in the last 12 months was Rs
12,00,000) BonusRs 12,000 p.a.

Compute his taxable gratuity assuming:

(i)  He is non-government employee and covered by the Payment of Gratuity Act

-a-

ParticularsAmount
Amount Received600000
  
Amount Exempt 
Actual Amount Received600000
Rs 10000010000000
15/26 Salary for each completed year of service124615.38
 (5000+3000)*27*15/26
  
Min Exempt124615.38
  
Amount taxable475384.62

-ea-

(ii) He is non-government employee and not covered by Payment of Gratuity Act

-a-

ParticularsAmount
Amount Received600000
  
Amount Exempt 
Actual Amount Received600000
Rs 10000010000000
15/26 Salary for each completed year of service104000
 

(5000+3000*60%

+1%*120000)*26*15/30

  
Min Exempt104000.00
  
Amount taxable496000.00

-ea-

(iii) He is a Government employee

-a-

In this case,amount is fully exempt

ParticularsAmount
Amount Received600000
  
Amount Exempt600000
  
Amount taxable0.00

-ea- 

About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 6 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com.
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