Gratuity Exempt U/s

10(10)
Adv. Dr. Chitra K. Deshpande
 Basics of Gratuity
 Gratuity is a monetary benefit given by the employer, but not paid
as part of the regular monthly salary. The provisions of gratuity
are governed by the Payment of Gratuity Act, 1972, and it is given
on the occurrence of any of the following events.
 a. On superannuation (means an employee who attains the age of
retirement is said to be in superannuation)
 b. On retirement or resignation
 c. On death or disablement due to accident or disease (the time
limit of 5 years shall not apply in the case of death or disablement
of the employee) It is mandatory for the employee to have
completed a minimum of five years in service to be able to
receive gratuity. It is not available for interns or temporary
employees.
Adv. Dr. Chitra K Deshpande
1. Employees Covered Under the Payment of
Gratuity Act (exemption u/s 10(10)(i)

 Every individual – working in a factory, mine, oil field,

port, railways, plantation, shops & establishments, or
educational institution having 10 or more employees on
any day in the preceding 12 months – is entitled to
gratuity.
 Once the Act becomes applicable to an employer, even if
the number of employees goes below 10, gratuity is still
applicable.

Adv. Dr. Chitra K Deshpande

Calculation of amount of gratuity
exempted from tax
 The least of the following is exempt from tax:
 Last salary (basic + DA)* number of years of employment*
15/26;
 Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as
per the amendment);
 Gratuity Actually received

Adv. Dr. Chitra K Deshpande

Practical Question 1: on Gratuity for Non-
Government employee covered by Payment
of Gratuity Act.
 X an Employee of PQ Co.Ltd receives Rs. 78,000/- as
Gratuity. He is covered by The Payment of Gratuity Act
1972, He retires on December12, 2022 after rendering
service of 38 years and 8 months. At the time of
retirement his monthly basic salary and dearness
allowance was Rs. 2,400 and Rs.800 per month
respectively. Is the entire amount of gratuity exempt
from tax ?

Adv. Dr. Chitra K Deshpande

Solution 1:Non-Government Employee
covered by Payment of Gratuity Act
 Name of the Assessee : Mr. X
 Previous Year : 01/04/2022 to 31/03/2023
 Assessment Year : 2023-24

 Computation of Taxable Gratuity for the A Y 2023-24 for

Employee Covered by Payment of Gratuity Act 1972.

Adv. Dr. Chitra K Deshpande

PARTICULARS AMOUNT AMOUNT
Gratuity received 78,000
Less : Least is exempt from - 72,000
tax u/s 10(10)(i)

1] 15 days salary for each 72,000

completed years of service
(WN 1)
2] Government Exemption 20,00,000
Limit
3] Actual Gratuity received 78,000
Taxable Gratuity 6,000

Adv. Dr. Chitra K Deshpande

WORKING NOTE 1
 1] Salary for this means Basic + D.A
 = 2,400 + 800 = 3,200 Per month.
 2] 15 days salary = 3,200 x 15/26 = 1,846.15
 3] Completed year of service = if period of service is 6
months or more than one complete year to be considered
and if less than 6 months ignore the months.
 Here X has rendered 38 years and 8 months means (more
than 6 months) so his service to be considered as 39 years
 So 15 days salary for each completed year of service =
1,846.15 X 39 year = 72,000/-

Adv. Dr. Chitra K Deshpande

Class work
 Vineet an employee of LMN Ltd, receives Rs.
45,000/- as gratuity under the payment of
Gratuity Act, 1972. he retires on 10th November
2022 after rendering service of 30 years 4 months.
At the time of retirement monthly salary was Rs.
2,340 (inclusive of DA of Rs. 200 per month).
Calculate amount of gratuity chargeable to tax in
the hands of Vineet for AY 2023-24.

Adv. Dr. Chitra K Deshpande

2. Employees Not Covered Under the Payment
of Gratuity Act (Exemption U/s 10(10)(ii)

 There is no law that restricts an employer from

paying gratuity to his employees, even if the
organization is not covered under the Payment of
Gratuity Act.
 The amount of gratuity payable to the employee
can be calculated based on half month’s salary for
each completed year.

Adv. Dr. Chitra K Deshpande

Calculation of amount of gratuity
exempted from tax


The least of the following are exempt from tax:

 Last 10 month’s average salary (basic + DA)* number of
years of employment* 1/2;
 Rs. 10 lakhs (the hike to Rs 20 lakhs is not applicable
for employees not covered under the Payment of
Gratuity Act)
 Gratuity actually received

Adv. Dr. Chitra K Deshpande

Rules for calculation for Non Government
employee not covered by Payment of
Gratuity Act
 1] Salary for this purpose means = Basic Salary + Dearness
Allowance if the terms of the employment so provide +
Commission at a fixed percentage of turnover achieved by
an employee.
 2] Average monthly salary is calculated on the basis of
salary for ten months immediately preceding the month of
employee retired.(same as in Leave salary)
 3] While calculating length of service no fractions to be
considered only completed years to be taken.
Adv. Dr. Chitra K Deshpande
Practical Question 2: Gratuity for Non-
Government employee Not covered by
Payment of Gratuity Act.
 Raghav who is not covered by The Payment of
Gratuity Act 1972, retires on 20th November 2022
from ABC Ltd. And receives Rs. 1,86,000/- as gratuity
after service of 38 years and 10 months. His salary is
Rs. 8,000/- upto 31st July 2022 and August onwards
Rs. 9,000/- per month. He also gets Rs. 500 DA out
of which only 69% is forming part of retirement
benefit. How much gratuity is chargeable to tax in
the hands of Raghav for AY 2023-24?
Adv. Dr. Chitra K Deshpande
Solution 2:Non-Government Employee
Not covered by Payment of Gratuity Act
 Name of the Assessee : Mr. Raghav
 Previous year : 01/04/2022 to 31/03/2023
 Assessment Year : 2023-24
 Computation of Taxable Gratuity for AY 23-24 where
employee is not covered by Payment of Gratuity Act 1972.

Adv. Dr. Chitra K Deshpande

PARTICULARS AMOUNT AMOUNT
Gratuity received 1,86,000
Less : Least is Exempt u/s 10(10)(ii) for - 1,64,255
non-government employee not covered
by payment of gratuity act 1972.

1] half months average salary (10 1,64,255

months average salary) for each
completed year of service (WN 1)

2] Government Exemption 10,00,000

3] Actual Gratuity received 1,86,000
Taxable Gratuity 21,745

Adv. Dr. Chitra K Deshpande

Solution 2 : Working Note 1 :
 Half months average salary (10 months average salary) for each
completed year of service.
 Basic Salary for 10 months from January 1, 2022 to 31st October 2022
 = 8,000X7month + 9,000 X 3 months = 83,000
 DA (69% is forming part of retirement benefit)
 (500 X69%= 345 X 10 months = 3,450
 Total Salary for 10 months 86,450
 Average monthly salary = 86,450/10 months = 8,645
 Half months average salary = 8,645X1/2 =4,322.50
 Completed years of service = 38 years
 4,322.50 X38 = 1,64,255/-
Adv. Dr. Chitra K Deshpande