Do You Know About Your Gratuity’s Treatment While Filing Your Return?

Gratuity usually refers to a lump sum payment made by the employer in compensation of past services. It is one of the retirement benefits granted by an employer to his employees. Employees covered by the Payment of Gratuity Act, 1972 are entitled to gratuity as per the rules provided in section 4(2) and 4(3) of the said act. All other employees are entitled to gratuity as per terms of contract of employment.

Tax treatment of gratuity: Gratuity is taxable as salary as per section 17(1) (iii) subject to exemption as provided in section 10(10) as follows:

Tax treatment of gratuity depends on the status of the employees. Status of the employee and tax treatment of gratuity in different situations are discussed below:

Gratuity received by government employees and employees of local authority: Any death-cum-retirement gratuity received by a Central government or a State government employee or an employee of local authority is wholly exempt from tax under section 10(10) (i).

Gratuity received by a non-Government employee covered under the Payment of Gratuity Act, 1972: Any gratuity received by a non-Government employee covered under the Payment of Gratuity Act, 1972 is exempt from tax under section 10(10)(ii) to the extent of the least of the following:

Meaning of wages: Wages mean all cash emoluments including dearness allowance but excluding any bonus, commission, house rent allowance, overtime wages and any other allowance. In simple word it means the basic wages and dearness allowance.

15 days wages- how to calculate: Fifteen days wages shall be calculated by dividing the monthly wages last drawn by him by 26 and multiplying the quotient by 15.

Completed year of service: Any service in excess of six months will be reckoned as one complete year. Thus, service for a period of 32 and 7 months shall be reckoned as 33 years and service for a period of 32 years and 5 months shall be reckoned as 32 years.

General considerations:

Relief under section 89: An employee can claim relief under section 89 in respect of gratuity included in his total income.

Gratuity due in one previous year but received in another year:  As per section 15, read with section 17(1), gratuity is taxable on due or payment, whichever is earlier. It means that if gratuity becomes due in the previous year 2009-10, the same is taxable in that year whether or not such gratuity is received by the employee in that year. According to section 10(10), exemption is allowed when gratuity is received. Thus, if gratuity becomes due in the previous year 2009-10 but received in previous year 2010-11 , such gratuity is fully taxable in the previous year 2009-10 , no exemption under section 10(10) is allowed. Moreover, as the total income of the employee for the previous year 2010-11 does not include gratuity, no exemption under section 10(10) will be allowed. Relief under section 89 is also allowed in the year in which gratuity is received.

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