Understanding Section 10(10C) of Income Tax Act: Exemption for Gratuity

March 19, 2023

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Section 10(10C) of Income Tax Act: Understanding the Tax Treatment of Gratuity

Gratuity is an important employee benefit that is given by employers to their employees as a form of appreciation for their long and dedicated service. It is a lump sum payment made to an employee on their retirement, resignation, or termination of employment. While gratuity is a valuable benefit, it is also subject to taxation under the Income Tax Act, 1961. However, there are provisions in the Act that provide relief from taxation on gratuity. In this blog, we will discuss Section 10(10C) of the Income Tax Act and its tax treatment for gratuity.

What is Section 10(10C) of Income Tax Act?

Section 10(10C) of the Income Tax Act is a provision that provides relief from taxation on gratuity. It states that any gratuity received by an employee on their retirement, resignation, or termination of employment, shall be exempt from income tax up to a certain limit.

Exemption limit for Gratuity under Section 10(10C)

The exemption limit for gratuity under Section 10(10C) is calculated based on the employee’s years of service with the employer. As per the Act, the exemption limit is 15 days of the employee’s last drawn salary for each completed year of service. In other words, the formula for calculating the exemption limit is as follows:

Exemption Limit = Last Drawn Salary (Basic + DA)15/26Number of Years of Service

Headline: Conditions for claiming exemption under Section 10(10C)

To claim exemption under Section 10(10C), the following conditions must be met:

The gratuity must be received by the employee on their retirement, resignation, or termination of employment.
The gratuity must be received from their employer, including former employer or any other employer.
The amount of gratuity received must not exceed the exemption limit as per the formula mentioned above.
The employee must have completed a minimum of 5 years of continuous service with the employer.

Tax implications if gratuity exceeds the exemption limit

If the gratuity received by the employee exceeds the exemption limit, the excess amount is taxable as per the employee’s income tax slab rate. However, if the employee has already received gratuity in the past from the same employer, the exemption limit is reduced by the amount of gratuity received earlier.

How to calculate the exemption limit for Gratuity under Section 10(10C)

To calculate the exemption limit for gratuity under Section 10(10C), the following formula is used:

Exemption Limit = Last Drawn Salary (Basic + DA) * 15/26 * Number of Years of Service

Let us understand this formula with an example:

Suppose Mr. Kumar has worked with XYZ Ltd. for 30 years and his last drawn salary (Basic + DA) is Rs. 50,000. Then, the exemption limit for gratuity as per the formula would be:

Exemption Limit = 50,000 * 15/26 * 30 = Rs. 8,65,385

This means that Mr. Kumar can receive gratuity up to Rs. 8,65,385 without any tax implications.

How to claim exemption under Section 10(10C)

To claim exemption under Section 10(10C), the employee needs to submit Form I to their employer. Form I is a declaration form that needs to be submitted by the employee to their employer to claim exemption from gratuity. The form needs to be submitted at least one month before the date of retirement or resignation.

In addition to Form I, the employee also needs to submit the following documents to their employer:

Proof of service period
Proof of last drawn salary
Proof of gratuity received

Once the employee submits these documents, the employer will verify the details and calculate the exemption limit as per the formula mentioned above. If the gratuity amount is within the exemption limit, the employer will pay the gratuity amount to the employee without deducting any tax. If the gratuity amount exceeds the exemption limit, the employer will deduct tax as per the employee’s income tax slab rate.

Tax implications of gratuity in case of death of an employee

In case of the death of an employee, the gratuity received by the legal heir or nominee of the employee is exempt from income tax without any limit. However, if the legal heir or nominee receives the gratuity in installments, the exemption limit will be calculated based on the number of years of service of the deceased employee.

Conclusion

Section 10(10C) of the Income Tax Act provides relief from taxation on gratuity up to a certain limit. It is important for employees to understand the provisions of Section 10(10C) to ensure that they claim the exemption correctly and avoid any tax-related issues. Employers also need to follow the guidelines mentioned in the Act and calculate the exemption limit accurately while paying gratuity to their employees.

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Frequently Asked Questions (FAQs)

Q: What is Section 10(10C) of the Income Tax Act?

A: Section 10(10C) is a provision in the Income Tax Act that provides relief from taxation on gratuity received by employees on their retirement, resignation, or termination of employment up to a certain limit.

Q: What is the exemption limit for gratuity under Section 10(10C)?

A: The exemption limit for gratuity under Section 10(10C) is 15 days of the employee’s last drawn salary (Basic + DA) for each completed year of service. The formula for calculating the exemption limit is Last Drawn Salary * 15/26 * Number of Years of Service.

Q: What are the conditions for claiming exemption under Section 10(10C)?

A: To claim exemption under Section 10(10C), the following conditions must be met:

The gratuity must be received by the employee on their retirement, resignation, or termination of employment.
The gratuity must be received from their employer, including former employer or any other employer.
The amount of gratuity received must not exceed the exemption limit as per the formula mentioned above.
The employee must have completed a minimum of 5 years of continuous service with the employer.

Q: What happens if the gratuity received exceeds the exemption limit?

A: If the gratuity received exceeds the exemption limit, the excess amount is taxable as per the employee’s income tax slab rate.

Q: How to claim exemption under Section 10(10C)?

A: To claim exemption under Section 10(10C), the employee needs to submit Form I to their employer, along with the proof of service period, proof of last drawn salary, and proof of gratuity received.

Q: What is the tax implication of gratuity in case of the death of an employee?

A: In case of the death of an employee, the gratuity received by the legal heir or nominee of the employee is exempt from income tax without any limit. However, if the legal heir or nominee receives the gratuity in installments, the exemption limit will be calculated based on the number of years of service of the deceased employee.

Q: What is the deadline for submitting Form I to claim exemption under Section 10(10C)?

A: Form I needs to be submitted at least one month before the date of retirement or resignation to claim exemption under Section 10(10C).

Q: Is the exemption limit for gratuity under Section 10(10C) applicable to all employees?

A: No, the exemption limit for gratuity under Section 10(10C) is applicable only to employees covered under the Payment of Gratuity Act, 1972.