Gratuity is an amount paid by an employer to an employee as a token of appreciation for the services rendered by the employee. It is a form of retirement benefit provided to employees upon their retirement, resignation, or death. The Income Tax Act provides exemptions for gratuity payments under Section 10(10). This article aims to provide a comprehensive understanding of Section 10(10) and the gratuity exemptions provided under this section.
What is Section 10(10) of the Income Tax Act?
Section 10(10) of the Income Tax Act provides exemptions for certain types of gratuity payments made to employees. The section outlines the exemptions for gratuity payments made to employees based on their type of employment, years of service, and amount of gratuity received.
Gratuity Exemptions under Section 10(10):
- Gratuity received by Government Employees: Gratuity payments received by government employees are fully exempt from income tax under Section 10(10)(i) of the Income Tax Act. This exemption applies to employees of the central government, state government, or local authorities.
- Gratuity received by Non-Government Employees: Gratuity payments received by non-government employees are exempt up to a certain limit. The limit is determined based on the employee’s years of service and the amount of gratuity received. The exemptions for non-government employees are as follows:
- For employees covered under the Payment of Gratuity Act, of 1972, the exemption limit is the lowest of the following:
- Actual gratuity received
- 15 days’ salary for each completed year of service
- Rs. 20 lakhs
- For employees not covered under the Payment of Gratuity Act, of 1972, the exemption limit is the lowest of the following:
- Actual gratuity received
- Half month’s average salary for each completed year of service
- Rs. 20 lakhs
- Gratuity received by Family Members: In the case of an employee’s death, the gratuity received by the employee’s family members is fully exempt from income tax under Section 10(10)(ii) of the Income Tax Act.
Conclusion:
Section 10(10) of the Income Tax Act provides important exemptions for gratuity payments made to employees. These exemptions are based on the type of employment, years of service, and amount of gratuity received. Understanding these exemptions can help employees and employers plan their retirement benefits effectively. It is important to note that the exemptions provided under Section 10(10) are subject to change, and it is advisable to consult a tax expert for the latest information on gratuity exemptions.
Frequently Asked Questions:
Q1. What is gratuity as per the Income Tax Act?
A1. Gratuity is a retirement benefit paid by an employer to an employee as a token of appreciation for their long-term service. It is a lump sum payment made to the employee on their retirement, resignation, or death.
Q2. Who is eligible for gratuity as per the Income Tax Act?
A2. As per the Income Tax Act, all employees who have completed a minimum of 5 years of continuous service with an employer are eligible for gratuity.
Q3. Is gratuity taxable under the Income Tax Act?
A3. Yes, gratuity is taxable under the Income Tax Act. However, there are certain exemptions and deductions available under the Act which can reduce the taxable amount.
Q4. What is the maximum amount of gratuity that can be exempt from tax?
A4. As per the Income Tax Act, the maximum amount of gratuity that can be exempt from tax is Rs. 20 lakhs. Any amount above this limit will be taxable as per the applicable tax rate.
Q5. Are there any conditions for availing of the tax exemption on gratuity?
A5. Yes, certain conditions need to be fulfilled to avail of the tax exemption on gratuity. The employee should have completed a minimum of 5 years of continuous service with the employer, the gratuity should be paid on retirement, resignation, or death, and the maximum exemption limit of Rs. 20 lakhs should not be exceeded.
Q6. Can an employee receive gratuity from multiple employers?
A6. Yes, an employee can receive gratuity from multiple employers. However, the maximum exemption limit of Rs. 20 lakhs will apply to the total amount of gratuity received from all employers.
Q7. How is gratuity calculated as per the Income Tax Act?
A7. Gratuity is calculated as 15 days’ salary for every completed year of service subject to a maximum limit of Rs. 20 lakhs.
Q8. Is there any provision for a tax deduction on gratuity paid by the employer?
A8. Yes, as per the Income Tax Act, the employer is allowed to claim a tax deduction on the gratuity paid to the employee as a business expense.
Q9. What is the procedure for claiming tax exemption on gratuity?
A9. The employee needs to submit Form I to the employer to claim tax exemption on gratuity. The employer will then calculate the tax liability and deduct TDS (Tax Deducted at Source) accordingly.
Q10. Can an employee receive a gratuity before completing 5 years of continuous service?
A10. Yes, an employee can receive gratuity before completing 5 years of continuous service in case of death or disablement due to accident or disease. In such cases, the minimum service period requirement is waived.
