In the present age, Gratuity is no more a gratuitous payment but has become legally compulsory in most of the cases. Gratuity being a retirement benefit is generally payable at the time of employment and on basis of duration of service. Where the payment of Gratuity Act, 1972, is inapplicable, an employee can claim gratuity under the terms of contract of employment.
In Simple words, the taxation part
comes into picture only in the last two cases, which are dealt below in
IN THE CASE OF EMPLOYEES COVERED BY THE PAYMENT OF GRATUITY ACT, 1972, [SEC. 10(10)(ii)]:-
Any gratuity received by an employee, covered by the
Payment of Gratuity Act, 1972, is exempt from tax on the following basis
How to find out length of service – If the period of service is 6
months or less than 6 months, it shall be ignored for this purpose. Conversely,
if the period of the service is more than 6 months it shall be taken as one
Meaning of ‘Salary’ – “Salary” for the purpose of the
aforesaid limits means salary last drawn by the employee and includes
dearness allowance but does not include any bonus, commission, house rent
allowance, overtime wages and any other allowance.
Salary of 15 days – Salary of the 15 days is
calculated by dividing salary last drawn by 26, i.e. maximum number of
working days, in a month. For instance, if monthly salary at the time of
retirement is Rs. 1000, 15 days’ salary would come to Rs. 576.92/- (i.e., Rs.
1000 × 15 ÷26).
IN THE CASE OF EMPLOYEES NOT
COVERED BY THE PAYMENT OF GRATUITY ACT, 1972,
Any gratuity received by an employee, not covered by the Payment of Gratuity Act, 1972, is exempt from tax on the following basis
How to find out length
of service – Same as
of ‘Salary’ – Same
Half Month’s Average Salary – Average Salary being calculated on same lines as in case of Leave Salary, such Average monthly salary divided by 2 is Half month’s Average Salary.
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