Gratuity: Eligibility, calculation, revenue tax and different guidelines it is advisable to know

The revenue tax legal guidelines exempt gratuity: for some it’s totally tax-free whereas for some it’s tax-free to sure extent. Likewise, there may be confusion about method of calculating the eligibility in addition to the computation of quantum of gratuity. This article offers with how the gratuity is calculated in addition to its taxation half.

Who is entitled to obtain gratuity?

Any individual working in a manufacturing facility, Port, plantation and many others. and an individual working in another institution, the place ten or extra individuals have been employed on any day throughout the previous twelve months, are entitled for if they’ve rendered steady providers for minimal of 5 years with the identical employer. The gratuity is payable on the time of his retirement/demise or termination of his employment. In case of demise or disablement of the worker the requirement of 5 years of steady service will not be relevant. 

While ascertaining the interval of 5 years, a interval of greater than 240 days of steady providers shall be taken as a full yr. So in case you allow your organisation earlier than completion of full 5 years however have rendered providers for 4 years and 200 and forty days, you might be eligible to get gratuity. However, in case of individuals working with institutions which works for lower than six days per week steady service of greater than 4 years and 100 and ninety days is taken into account as a steady service of 5 years for figuring out whether or not one is eligible to get gratuity or not.

Computation of Gratuity

In case of Central Government workers, members of civil providers, defence personnel, all India providers, state administrative providers, workers of native authorities and state workers the calculation of gratuity is completed based on the pension code and guidelines for relevant for such providers.

In case separate pension guidelines should not prescribed, the pension is calculated as per the provisions of Payment of Gratuity Act, 1972. The quantity of gratuity payable is labored out on the fee of 15 days’ wage for every accomplished yr of service. For the aim of computing a yr for calculation of gratuity, a interval of greater than six month must be handled as full yr and subsequently the interval of service of lower than six months is to be ignored. The wage for 15 days is arrived at by dividing the month-to-month fundamental wage by 26 and multiplying it by 15. This is the minimal gratuity an worker is entitled. An employer if that’s the case needs will pay gratuity larger than the one minimal prescribed below fee of gratuity Act, 1972. 

Taxation of gratuity

The gratuity acquired by all the federal government workers, workers of municipalities and defence forces is totally exempt with none higher financial restrict. 

For different workers the gratuity to the extent of minimal payable below the Payment of Gratuity Act, 1972 is tax-free. So in case the gratuity is paid for greater than 15 days of every accomplished yr of service the surplus gratuity shall turn into taxable in your arms regardless of the general quantity of gratuity. For the aim of computing the wage for 15 days, the wage drawn by you throughout the ten months simply earlier than the date when the gratuity turns into due must be thought of. 

Salary for the aim of computing gratuity exemption is fundamental wage and dearness allowance payable if the identical is to be handled for phrases of employment so present whereas the opposite funds like House Rent Allowance, Leave Travel Allowance should not taken into consideration although in broader sense these funds are additionally handled as wage. So even when your employer computes the quantity of gratuity payable on the premise of wage which incorporates the opposite allowances, for exemption functions below the revenue tax legal guidelines, the essential wage and the dearness allowance will solely be thought of.

In absolute phrases gratuity acquired in combination upto 20 lakhs is exempt throughout your lifetime and gratuity acquired past this limits turns into taxable for different class of worker. The exemption restrict of twenty lakhs is to be utilized cumulatively to the gratuities acquired by you from all of the employers taken collectively. So in case of all gratuities acquired and claimed exempt prior to now should be decreased from exempt quantity of twenty lakhs for figuring out the gratuity eligible for exemption out of your final employer. Since the quantity of gratuity exempt in absolute phrases has been elevated very just lately, workers who had paid tax on gratuity because of it being in extra of ten lakhs rupees earlier will have the ability to declare the exemption for the improved steadiness of ten lakhs now every time they obtain additional gratuity. So in case of a number of gratuities even when the quantity of gratuity presently acquired doesn’t exceed 15 days of wage for every accomplished yr of service, if will turn into taxable if it exceeds the quantity of twenty lakh rupees together with the quantity claimed exempt prior to now.

Balwant Jain is a tax and funding knowledgeable and might be reached on jainbalwant@gmail.com and @jainbalwant on Twitter

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