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Tax upon Gratuity |
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An employee may receive his gratuity at the time of his retirement or his legal heir can also receive the gratuity in case a sudden and sad demise of the employee happens. Gratuity, received by an employee on his retirement, is taxable. It will come under the scope of Salary. If, the gratuity is received by the legal heir, then it becomes taxable under the head of Income from Other Sources. In both the cases which have already been mentioned, a specific limit of gratuity is exempted from the total amount with the empowerment of the provisions which has been laid down in 10(10) of the I.T Act, 1961.
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In order to make the method of exemption of gratuity more organized and harmonized, the employees are classified under three categories. Here we will give a brief overview about the exemption of tax upon gratuity in all the three cases:
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Tax upon gratuity for Government Employees: It is a matter of great advantage for the government employees that the total amount of death-cum-retirement gratuity is exempted from tax and nothing is therefore taxable under the head Salaries.
- Employees under protection of Payment of Gratuity Act, 1972: The employees who are covered under the Payment of Gratuity Act,1972 are entitled to receive the gratuity with a very moderate level of exemption. Here follows the minimum level of exemptions:
a) Fifteen days' salary, it will be 7 days in the case of seasonal employment, for every completed year of service. But at the same time it has to be kept in mind that the employment must be more than six months.
b) The amount of gratuity actually received
- Tax upon gratuity for other employees: In the case of other employees the gratuity received or yet to be received on his retirement or on his becoming incapacited prior to such retirement or termination of his employment or any gratuity received by his heirs is exempt to the extent of the minimum of the following amounts:
a) Actual amount of gratuity received
b) Half month's average salary, which means the average of the salary drawn by the employee for 10 months immediately preceding the month in which he retires, for every completed year of service
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