Gratuity law; including commentary on the Payment of gratuity act, 1972
Gratuity is a voluntary extra payment made to employees in addition to the salary promised. Such payments and their size vary from organization to organization. Though by definition it is voluntary in India it is legally guaranteed under the Payment of Gratuity Act 1972. Since it is governed by the act it is taxable. Let us examine the payment and taxability.
Gratuity is a voluntary extra payment made to employees in addition to the salary promised. Such payments and their size vary from organization to organization. Though by definition it is voluntary in India it is legally guaranteed under the Payment of Gratuity Act 1972. Since it is governed by the act it is taxable. Let us examine the payment and taxability.
Any gratuity received by an employee as calculated under the Payment of Gratuity Act 1972 to the extent of Rs. Ten Lakhs is exempt from Tax. This is with effect from May 24, 2010.
All Organizations which have employed 10 or more persons or have employed 10 or more persons in the past come under the Payment of Gratuity Act 1972.
Gratuity is payable when an employee has rendered continuous service of five years or more. In case of death or disablement the five year limit is waived. The amount becomes payable when the employee leaves the organization either on termination of employment or retirement or death or disablement.
Gratuity is calculated at the rate of 15 days of basic salary last drawn for every completed year of service or part thereof in excess of six months. So if you have completed six months or more it would be considered as a complete year. The number of days for a month is considered as 26 days, in case of employees earning monthly salary. So if your basic salary is Rs.10000/- per month and you have completed 5years 7 months. The Gratuity calculated would be 10000 * 6 years * 15 / 26 i.e. Rs. 34,615/- but if it was 5 years 5 months it would be Rs. 28,846/- since the number of years would be taken as 5 years.
Now we mentioned that Gratuity is exempt to the extent of Rs. Ten Lakhs. This Ten Lakhs is over your entire life. That means every receipt of gratuity below ten lakhs is not tax free. The cumulative Gratuity received over your life time from one or many suppliers to the extent of Rs. Ten Lakhs is exempt. The moment it crosses this figure the amount above Rs. Ten Lakhs is taxable.
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