GRATUITY

Mr. Vikas Naik, a professor of MET College, receives Rs. 25,00,000 as gratuity. He is covered by the
Payment of Gratuity Act, 1972. He finally decided to get retired on January 31, 2021 after rendering
service of 38 years and 8 months. At the time of retirement his monthly Basic Salary and Dearness
Allowance was Rs. 50,000 and Rs. 15,000 respectively.

Is the entire amount of gratuity exempt from tax?

Will your answer be different if he was not covered by Payment of Gratuity Act, 1972?

Solution:

As per section 10(10), the amount of any death-cum-retirement gratuity, received or receivable by an
employee from the employer at the time of retirement shall be exempt fully in the hands of government
employee.

However, such amount, if received or receivable by a non-government employee shall not be fully
exempt u/s 10(10). The exemption u/s 10(10) in case of non-government employee shall be restricted
subject to certain limits which depends on the fact whether the employee is covered by the Payment of
Gratuity Act, 1972 or not.

A) Covered by the Payment of Gratuity Act,1972

In the instant case, Mr. Vikas Naik is a non-government employee who is covered by the Payment of
Gratuity Act, 1972. Therefore, the amount of gratuity exempt u/s 10(10) in his hands shall be least of
the following:

(a) Gratuity actually received or receivable 25,00,000

(b) Maximum Amount u/s 10(10) 20,00,000
(c) 15/26 (x) ** Last Drawn Salary p.m. (x) No. of years of service 16,87,500

15/26 (x) Rs. 75,000 p.m. (x) 39 years

Therefore, gratuity exempt in the hands of Mr. Vikas Naik shall be Rs. 16,87,500. And the amount of
gratuity taxable in his hands shall be Rs. 8,12,000 [I.e. Rs. 25,00,000 (-) Rs. 16,87,500).

Note:

(1) ** Last Drawn Salary p.m. = Basic Salary (+) Dearness Allowance of the month immediately preceding
to the month of retirement i.e. Rs. 50,000 (+) Rs. 15,000 = Rs. 75,000.

(2) Fraction of the year is treated as the whole year in computing no. of years of service as the fraction
exceeds 6 months.
B) Covered by the Payment of Gratuity Act,1972

However, if Mr. Vikas Naik was not covered by the Payment of Gratuity Act, 1972, then, in such case,

the amount of gratuity exempt u/s 10(10) in his hands would have been least of the following:

(a) Gratuity actually received or receivable 25,00,000

(b) Maximum Amount u/s 10(10) 20,00,000
(c) 1/2 (x) ** Average Salary p.m. (x) No. of completed years of service 14,25,000

1/2 (x) Rs. 75,000 p.m. (x) 38 years

Therefore, gratuity exempt in the hands of Mr. Vikas Naik shall be Rs. 14,25,000. And the amount of
gratuity taxable in his hands shall be Rs. 10,75,000 [i.e. Rs. 25,00,000 (-) Rs. 14,25,000).

Note:

(1) ** Average Salary p.m. = (Basic Salary (+) Dearness Allowance for 10 months immediately preceding
to the month of retirement / 10 months

i.e. [Rs. 50,000 (+) Rs. 15,000 ] (x) 10 / 10 i.e. Rs. 75,000.

(2) Fraction of the year is ignored as we have to consider only the no. of completed years of service.