CBDT APPROVES ENHANCEM ENT OF GRATUITY EXEMPTION LIMIT TO 10 LAKHS FROM

3.5 LAKHS

The Central Board of Direct Taxes has approved notification of ten lakh rupees as the maximum
amount of gratuity entitled to exemption under sub-clause (iii) of clause (10) of section 10 of the
Income Tax Act 1961.
The notification will be applicable to employees who retire, or become incapacitated before
retirement, or expire, or whose services are terminated, on or after the 24th May 2010.

Notification No. 43/2010 [F.No.200/33/2009-ITA.I], dated 11-6-2010

In exercise of the powers conferred by sub-clause (iii) of clause (10) of section 10 of the Income-
tax Act, 1961 (43 of 1961), and in supersession of Ministry of Finance, Department of Revenue,
notification no. S.O. 287 dated the 20th January, 1999 the Central Government, having regard to
the maximum amount of any gratuity payable to its employees, hereby specifies ten lakh rupees
as the limit for the purpose of the said sub-clause in relation to the employees who retire or
become incapacitated prior to such retirement or die on or after the 24th day of May, 2010 or
whose employment is terminated on or after the said date.

This is set Back for PSU employee who was retired between 01.06.2006 to 23.05.2010 and
getting Enhanced Limit of Gratuity 10 lakh as per Recommendation of Sixth pay commission .As
they are getting 10 Lakh Rupees from 01.01.2006 or 01.01.2007 as the case may be but now new
exemption limit is available for PSU employees who has retired after 24.05.2010.So person retired
between 01.01.2006 to 23.05.2010 have to pay tax on gratuity received more than 3.5 Lakh
Rupees. Section 10(10) (iii) of the Income-tax Act, 1961 - Gratuity - Gratuity exemption limit raised
to Rs.10 lakhs

Gratuity Act 2010 w.e.f 24.05.10 limit 10 lakh Notified

Date of enforcement of Payment of Gratuity (Amendment) Act, 2010

Notification No. S.O. 1217(E), dated 24-5-2010

In exercise of the powers conferred by sub-section (2) of Section 1 of The Payment of Gratuity
(Amendment) Act, 2010 (15 of 2010), the Central Government hereby appoints the 24th day of
May, 2010, as the date on which the said Act shall come into force.

Gratuity Amount payable under Payment of Gratuity Act enhanced from Rs.3.5 lakhs to
Rs.10 lakhs

Payment of Gratuity (Amendment) Act, 2010 (No. 15 of 2010), dated 17-5-2010

An Act further to amend the Payment of Gratuity Act, 1972.

Be it enacted by Parliament in the Sixty-first Year of the Republic of India as follows:-

Short title and commencement.

(1) This Act may be called the Payment of Gratuity (Amendment) Act, 2010.
(2) It shall come into force on such date as the Central Government may, by notification in the
Official Gazette, appoint.
Amendment of section 4 of Act 39 of 1972.

2. In section 4 of the Payment of Gratuity Act, 1972, in sub-section (3), for the words “three lakhs
and fifty thousand rupees”, the words “ten lakh rupees” shall be substituted.
Tax Liability on Gratuity
As per Income Tax act, Section 10(10), employees has been divided in three categories.

1. Employee of Central/State Government and Local bodies: Gratuity received by these

employees is fully exempted without any limit.
2. Employee covered under Payment of Gratuity Act: Amount received as per Gratuity Act is
fully exempted .Means Income Tax has not defined /set any Limit for such employees.
Means as soon as the amount of Gratuity Act, enhanced, Income tax Limit will also
enhanced. As the income Tax act only refer the Payment of Gratuity Act.

3. Other Employees: For other remaining employee Limit is defined under the Income Tax act
,which is at present 3,50000.But many PSU ,which is not covered under the Sate or Central
Govt. definition as per serial number 1 and 2 above ,has started to pay ,gratuity as per Sixth
pay commission ,maximum up to 10 lakh .So amount in excess of 3.5 lakh is taxable in hand of
such employees .As the Limit is enhanced in Payment of Gratuity Act as per serial number 2
even then separate notification under this sub clause [10(10)(iii)} is required .The Limit is
related to date of retirement /resignation and not to date of receipt. Now PSU employees are
getting Gratuity at 10 lakh Rupees after tax deduction after Maximum ceiling of 3.5 lakh .As the
Limit of income tax exemption has been increased in case of Govt. employee as well as for
employees covered under payment of Gratuity act, Limit for PSU employee should also be
increased .I request to All PSU employees to raise their voice against this issue.

Payment of Gratuity (Amendment) Act, 2010 limit Rs.3.5 lakhs to Rs. 10 lakhs

Update (20.05.2010): Gratuity Bill, 2010 is now notified as under.

Gratuity Amount payable under Payment of Gratuity Act enhanced from Rs.3.5 lakhs to Rs.10
lakhs
Payment of Gratuity (Amendment) Act, 2010 (No. 15 of 2010), dated 17-5-2010
An Act further to amend the Payment of Gratuity Act, 1972.
Be it enacted by Parliament in the Sixty-first Year of the Republic of India as follows:-
Short title and commencement.
1. (1) This Act may be called the Payment of Gratuity (Amendment) Act, 2010.
(2) It shall come into force on such date as the Central Government may, by notification in the
Official Gazette, appoint.

Amendment of section 4 of Act 39 of 1972.

2. In section 4 of the Payment of Gratuity Act, 1972, in sub-section (3), for the words “three lakhs
and fifty thousand rupees”, the words “ten lakh rupees” shall be substituted.

In a move that will provide relief to the salaried class, the Union cabinet on Thursday (04.03.2010)
gave its consent for enhancing the gratuity limit at the time of retirement to Rs.10 lakh.

The government will bring an amendment to the gratuity Act by tabling a fresh bill in the current
session of Parliament in the coming days.

The move comes after several representations by employees' groups. They had asked for a
removal of gratuity ceiling.

The current enhancement is way above the current limit of Rs. 3.5 lakh, sources said. It will
provide relief to employees at retirement.

Often, central and state government staff with high incomes did not get the full amount accrued in
gratuity.
With the enhancement of the limit, they will get more benefits at the time of retirement.
Employees expected the benefit to be announced in the budget. But with the UPA government
bringing a new bill in the same session, the concerns will be addressed.

Whether Income Tax Limit In respect of gratuity increased?

After reading above news, First response of all person is that "whether Income tax limit 3.5 Lakh
about gratuity Increased or not?
Before answering the question, I will explain you the provision about Gratuity as per Income Tax
act.

As per Income Tax act, Section 10(10), employees has been divided in three categories.

1. Employee of Central/State Government and Local bodies: Gratuity received by these

employees is fully exempted without any limit.
2. Employee covered under Payment of Gratuity Act: Amount as per Gratuity Act is fully
exempted .Means Income Tax has not defined /set any Limit for such employees means as
soon as the amount of Gratuity Act ,enhanced by the Cabinet as proposed ,Income tax
Limit will also enhanced. As the income Tax act only refer the Payment of gratuity act.
3. Other employee: For other remaining employee Limit is defined under the Income Tax act
,which is at present 3,50000.But many PSU ,which is not covered under the Sate or Central
Govt. definition as per serial number 1 and 2 above ,has started to pay ,gratuity as per Sixth
pay commission ,maximum up to 10 lakh .So amount in excess of 3.5 lakh is taxable in
hand of such employees .In case of Limit is enhanced in Payment of Gratuity Act as per
serial number 2 even then separate notification under this sub clause[10(10)(iii)} is required
.The Limit is related to date of retirement /resignation and not to date of receipt.

Suppose: A person has retired on 28.2.2010 and received gratuity amount on 15.04.2010, Limit is
enhanced from 01.04.2010.In this case person can not avail enhanced Limit.

The Good news is here that in past, every time, Govt. has raised this limit with retrospective effect
.Increase In Limit old History(recent three) is Given Below.

1. Exemption limit raised from Rs. 2,50,000 to Rs. 3,50,000 in relation to employees who retire
terminated/resigned or become incapacitated prior to such retirement or die on or after 24-
9-1997(date of Notification 20.1.1999-No. 10772 [F. No. 200/77/97-IT(A-I)]
2. Exemption limit of Rs.1,00,000 raised to Rs. 2,50,000 in relation to employees who
retire/terminated/resigned or become incapacitated prior to such retirement or die on or
after 1-4-1995 ( Notification : No. SO 394, dated 1-2-1996.)
3. Exemption limit in relation to employees who retire or become incapacitated prior to such
retirement or die, on or after 1-4-1988, or whose employment is terminated on or after 1-4-
1988 (Notification: No. GSR 405, dated 28-4-1988.)

Further section 10(10) (iii) says that Limit under this sub clause should be notified in accordance
with limit applicable to central Govt. employees. So later or sooner the Limit under This section will
also be raised to 10 Lakh .and I wish that limit will be increased from retrospection effect from
01.01.2006.so answer is that presently limit is not enhanced for "other employee" categories
However employee can claim relief under section 89(1) on taxable gratuity amount .The
method to calculate 89(1) relief for gratuity is different from normal 89(1) method applicable
for salary received in Arrears or Advance.

89(1) relief calculator to bifurcate arrears received in 2009-10 FY or 2008-09

Section 10(10) is reproduced hereunder.

section10(10) (i) any death-cum-retirement gratuity received under the revised Pension Rules of
the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972,
or under any similar scheme applicable to the members of the civil services of the Union or
holders of posts connected with defence or of civil posts under the Union (such members or
holders being persons not governed by the said Rules) or to the members of the all-India services
or to the members of the civil services of a State or holders of civil posts under a State or to the
employees of a local authority or any payment of retiring gratuity received under the Pension Code
or Regulations applicable to the members of the defence services ;
(ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it
does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and
(3) of section 4 of that Act ;
(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated
prior to such retirement or on termination of his employment, or any gratuity received by his
widow, children or dependants on his death, to the extent it does not, in either case, exceed one-
half month’s salary for each year of completed service calculated on the basis of the average
salary for the ten months immediately preceding the month in which any such event occurs,
subject to such limit as the Central Government may, by notification in the Official Gazette, specify
in this behalf having regard to the limit applicable in this behalf to the employees of that
Government :
Provided that where any gratuities referred to in this clause are received by an employee from
more than one employer in the same previous year, the aggregate amount exempt from income-
tax under this clause shall not exceed the limit so specified