Tax Exemption limit on Gratuity

As per Income Tax act ,Section 10(10),employees has been divided in three categorise.

  1. Employee of Central/State Government and Local bodies :Gratuity received by these employees is fully exempted without any limit.
  2. Employee covered under Payment of Gratuity Act: Amount as per Gratuity Act is fully exempted .Means Income Tax has not defined /set any Limit for such employees. Means as soon as the amount of Gratuity Act ,enhanced by the Cabinet as proposed ,Income tax Limit will also enhanced. As the income Tax act only refer the Payment of gratuity act .

Other employee:

For other remaining employee Limit is defined under the Income Tax act ,which is at present 3,50,000.

But many PSU ,which is not covered under the Sate or Central Govt definition as per sr number 1 and 2 above ,has started to pay ,gratuity as per Sixth pay commission ,maximum up to 10 lakh .So amount in excess of 3.5 lakh is taxable in hand of such employees.

In case of Limit is enhanced in Payment of Gratuity Act as per sr number 2 even then separate notification under this sub clause[10(10)(iii)} is required .The Limit is related to date of retirement /resignation and not to date of receipt

GRATUITY CALCULATION

Employee Gratuity is calculated by the following formula:

(Basic + D.A) x 15 / 26 x No. of year in service*

Govt has enhanced the exemption limit for psu employees retired after 24.05.2010 read more from here
Section 10(10)(iii) of the Income-tax Act, 1961 – Gratuity – Gratuity exemption limit raised to Rs.10 lakhs

Notification No. 43/2010 [F.No.200/33/2009-ITA.I], dated 11-6-2010

In exercise of the powers conferred by sub-clause (iii) of clause (10) of section 10 of the Income-tax Act, 1961 (43 of 1961), and in supersession of Ministry of Finance, Department of Revenue, notification no. S.O. 287 dated the 20th January, 1999 the Central Government, having regard to the maximum amount of any gratuity payable to its employees, hereby specifies ten lakh rupees as the limit for the purpose of the said sub-clause in relation to the employees who retire or become incapacitated prior to such retirement or die on or after the 24th day of May, 2010 or whose employment is terminated on or after the said date.

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