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UPDATE: Illustrating Gratuity’s Tax Treatment. Date: February 12, 2015

As we promised, here is a simple example that illustrates the taxability of Gratuity. If you have any doubts with this illustration or in general, please reach out to us at fintuned.in@gmail.com

 

Mr. X had been working with a private company since past 15 years, 7 months. He is retiring on 5th April, 2014. His current Basic Salary = Rs 60,000 pm, DA = Rs 8,000 pm. He is going to receive a gratuity amount of Rs 7 lakhs on retirement.

Note: Mr. X’s basic salary and DA have been the same since past 1 year.

Solution
Lets consider 2 situations here – (A) Mr. X is covered under Payment of Gratuity Act, 1972; and (B) Mr. X is not covered under Payment of Gratuity Act, 1972.

(A) Mr. X  is covered under Payment of Gratuity Act, 1972

Maximum exemption from tax is least of the 3 below:

(i) Actual gratuity received; – Rs. 7,00,000.00

(ii) Rs 10,00,000;

(iii) 15 days’ salary for each completed year of service or part thereof – 15/26*16*68000 = Rs. 6,27,692.00

 

Therefore Rs. 6,27,692.00 is the Gratuity amount which is exempted and the balance amount will be taxable as per the Income Tax slab  for the year in which the gratuity amount has been received by the employee.

 

(B) Mr. X is not covered under the payments of Gratuity Act, 1972

Maximum exemption from tax is least of the 3 below:

(i) Actual gratuity received; – Rs. 7,00,000.00

(ii) Rs 10,00,000;

(iii) Half-month’s average salary for each completed year of service (no part thereof) — 34000*15 = Rs. 5,10,000.00

 

Therefore Rs. 5,10,000.00 is the Gratuity amount which is exempted and the balance amount will be taxable as per the Income Tax slab  for the year in which the gratuity amount has been received by the employee.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of any agency, organization, employer, or any company. Fintuned Co. LLP shall not be held responsible in any manner whatsover, for any decision/action taken by readers on the basis of the content mentioned in the article. Readers are requested to exercise their best judgement before taking any decision/action. Fintuned Co. LLP shall also not be held responsible for any copyright infringement committed by the author in the process of writing and/or publishing this article and in the event any such offence is found, cooperate with necessary authorities to take remedial action

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