Gratuity is a payment made by an employer to an employee in appreciation of the past services rendered by the employee. Gratuity can be either is received by the employee himself at the time of his retirement or the legal heir on the event of the death of the employee. Gratuity received by an employee on his retirement is taxable under the head Salary whereas gratuity received by the legal heir of the deceased employee shall be taxable under the head Income from other sources. However, in both the cases gratuity is exempt up to certain limit. For the purposes of exemption of gratuity under section 10(10), the employees are divided into three categories:
1. Govt. Employees and employees of local authority
2. Employees covered under the payment of Gratuity Act
3. Other employees.
1. Government Employees:
In the case of such employees entire amount of gratuity shall be exempt.
2. Employees covered under the payment of Gratuity Act, 1972
In such a case least of the following shall be exempt:
(i) The amount of gratuity actually received
(ii) 15/26 x last drawn salary x No. of years of service of part thereof in excess of 6 months
[However in the case of an employee who is employed in a seasonal establishment and is not so employed throughout the year, the exemption shall be for 7 days wages for each season.]
Gratuity recieved in excess of the minimum of the above amounts will be included in the salary.
Meaning salary for the purposes of Gratuity:
For the purpose of calculation of Gratuity salary means salary last drawn in cash and includes dearness allowance but does not include any bonus, commission. House rent allowance, overtime wages and any other allowance.
Other employees – who are not covered under the payment of Gratuity Act:
In such case gratuity received by him shall be exempt to least of the following:
1. Actual amount of gratuity received
2. ½ x Average Salary of Last 10 months x Number of completed year of service.
Salary and Average Salary: For this purpose salary includes dearness allowance only if the payment so provides, but excludes all other allowances or perquisites. However Supreme Court has held in the case of Gestetner Pvt. Ltd. that commission, if received as a fixed percentage of turnover achieved by the could form part of the salary.
Further average salary is to be calculated on the basis of the average of the salary for 10 months Preceding the month in which such event occurs.