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Taxability of death cum retirement gratuity

[Updated as on Mar 31, 2020]

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Taxability of gratuity received by an individual is governed by Section 10(10) of the Income Tax Act, 1961.

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Gratuity received which are fully exempt [10(10)(i)].

 

Death cum retirement gratuity received is fully exempt in the following cases:

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• Gratuity received under the revised pension rule of the Central Government.

• Gratuity received under the Central Civil Services (Pension) Rules, 1972

• Gratuity received under 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

 

Civil services, civil posts and all india services denotes the civil side of administration whereas defence services and posts connected with defence denotes the defense side of administration in the country.

 

Civil services comprises of civil services of the union and the state. All india services are common to both central and the state and comprises of Indian Administrative service, Indian Police service and Indian Forest service. Civil post means government service other than those services of Union or States which are formally constituted services. All posts hold by the public servants other than the posts in the Defence Forces shall be deemed to be civil posts.

 

Defence service means established defence services and post connected with defence denotes post which is controlled by the defence side of administration of the country.

 

Local authority shall mean a municipal committee, district board, body of port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund (Section 3(31) of the General Clauses Act, 1897). This includes Municipalities, District Boards, Panchayats, Port Trusts as decided in various judicial decisions. 

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Summarising, gratuity received by employees of Central and State governments and local authority is fully exempt from income tax. However employees of Statutory corporations are not covered by this exemption.

 

Gratuity received which are partially exempt [10(10)(ii) & (iii)].

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The gratuity amount received in the following cases is exempt partially:

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• any gratuity received under the Payment of Gratuity Act, 1972 is exempt to the extent it does not exceed an amount calculated as below:

  • fifteen days' wages based on the rate of wages last drawn by the employee concerned for every completed years of service. In case of any part period exceeding 6 months, it shall be counted as 1 year. [Section 4(2) of the Payment of Gratuity Act,1972]; or

  • A sum of rupees twenty lakhs [Section 4(3) of the Payment of Gratuity Act,1972 applicable from 29th March 2018]; whichever is lower.

 

In calculating the gratuity amount above, the following points may be noted:

• In the case of a piece-rated employee, daily wages shall be computed on the average of the total wages received by him for a period of three months immediately preceding the termination of his employment, and, for this purpose, the wages paid for any overtime work shall not be taken into account

• In the case of an employee who is employed in a seasonal establishment, and who is not so employed throughout the year, gratuity shall be calculated at the rate of seven days' wages for each season.

• In the case of a monthly rated employee, the fifteen days' wages shall be calculated by dividing the monthly rate of wages last drawn by him by twenty-six and multiplying the quotient by fifteen.

 

As per Section 2(s) of Payment of Gratuity Act, 1972, “wages” means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and includes dearness allowance but does not include any bonus, commission, house rent allowance, overtime wages and any other allowance.

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Consider an example where Raju an employee of a PSU and covered by Payment of Gratuity Act, 1972, has retired on 31/03/2020. He was last drawing salary of Rs.95000 (Basic- 55000, DA- 15000, HRA- 11000 and other allowance- Rs.14000). He joined service in 11/06/1980.

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Computation of the gratuity amount exempted: Lower of the following-

• 15 days wages of Rs.40384.62 ((55000+15000)*15/26) for 40 years => Rs.1615385.

• Rs.20 Lacs

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Amount of exemption is Rs.1615385.

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Suppose, Raju is a piece rated employee who has earned Rs.42000, Rs.48000, Rs.52000, Rs.54000, Rs.57500 & Rs.50800 during the last 6 months before his retirement on 31/03/2020.

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Daily wages => Average of Rs.54000, Rs.57500 & Rs.50800 for 91 days => Rs.1783.52

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Computation of the gratuity amount exempted:

 

Lower of the following-

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• 15 days wages @ Rs.1783.52 for 40 years => Rs.1070110.

• Rs.20 Lacs

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Amount of exemption is Rs.1070110.

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Suppose, Raju is employed in a seasonal establishment who has earned Rs.105000 in the last season of 90 days. Altogether he has worked for 118 seasons till his retirement on 31/03/2020.

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Computation of the gratuity amount exempted:

 

Lower of the following-

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• 7 days wages of Rs.105000 from 90 days for 118 seasons => Rs.963667.

• Rs.20 Lacs

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Amount of exemption is Rs.963667.

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• 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, subject to the condition that it does not exceed the lowest of the following:

  • 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

  • Rupees twenty lakhs as notified by the Government vide notification No. 16/2019 dated 08th March 2019 vide 10(10)(iii) of the Income Tax Act, 1961 in relation to the employees who retire or become incapacitated prior to such retirement or die on or after the 29th day of March, 2018 or whose employment is terminated on or after the said date. [Earlier limit was rupees ten lakhs].

 

“Salary" for this clause includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisite.

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For example, Mohan is an employee in a private concern and received Rs.1200000 as gratuity on his retirement on 31/12/2019. He joined service in 18/06/1991 and average salary received during last 10 months immediately preceding the month of his retirement was Rs.65000 including basic pay plus DA.

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Computation of the gratuity amount exempted:

 

Lower of the following-

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• 1/2 of average monthly salary of Rs.65000 for completed years of service of 28 years => Rs.910000.

• Rs.20 Lacs

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Amount of exemption is Rs.910000.

 

 

Gratuity if received more than once

 

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.

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Also there may be cases, where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years. In such cases, the amount which was earlier exempt will be reduced from the limit calculated under this clause, and exemption shall be available now only up to the revised limit so arrived.

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Consider for example, Mr.Anil received gratuity from 2 employers during FY 2019-20 of Rs.8 lacs and Rs.12.8 lacs. The aggregate amount of gratuity received is Rs.20.8 lacs which is more than the maximum ceiling of Rs.20 lacs. Hence the amount of gratuity exempted will be limited to Rs.20 lacs.

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Suppose Mr.Anil had received the gratuity of Rs.8 lacs in FY 2012-13 and had claimed exemption for the relevant assessment year. Now for the FY 2019-20, the applicable ceiling will be reduced by the amount of exemption already claimed such that the revised limit will be:

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Rs.20 lacs - Rs.8 lacs => Rs.12 Lacs

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The amount of exemption for FY 2019-20 shall be Rs.12 lacs out of gratuity received of Rs.12.8 lacs.

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Gratuity in case of resignation

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As per Board’s letter F.No. 194/6/73-IT(A-1) Dated 19.06.73 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1).

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Gratuity received by widow or other legal heirs

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Lump-sum payment made gratuitously or by way of compensation or otherwise to widow or other legal heirs of an employee who dies while still in active service is fully exempt in the hands of widow or other legal heirs of employee [Circular No. 573, dated 21-08-1990]. Hence gratuity received by a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax.

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Head of income

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Gratuity received from employer is taxable under the head income from salaries whereas gratuity received by widow or legal heir on the death of the employee is taxable under the head income from other sources.

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Relief under Section 89

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Where the amount received by way of gratuity exceeds the amount exempted under this clause, the assessee can claim relief under Section 89 read with Rule 21A(3). The relief shall be calculated in two methods as under:

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I.   Gratuity received in respect of past services of the assessee extending over a period of not less than       five years but less than fifteen years [Rule 21A(3)(b)]

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II.  Gratuity received in respect of past services of the assessee extending over a period of not less than        fifteen years [Rule 21A(3)(c)]

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