Jigar M. Patel
International Tax Attorney
Income-tax Exemption for Gratuity
Under the provisions of Section 10(10) of the Income-tax Act, gratuity received by an employee from his employer, on retirement, or becoming incapacitated before retirement, or expiring, or whose services are terminated, is exempt as under:
- In case of Government employees or employees of a local authority, the whole of the gratuity amount received is exempt from tax.
- Where the gratuity is received by an employee covered under the Payment of Gratuity Act, 1972, the tax exemption is limited to the extent of the least of the following:
- 15 days salary based on the salary last drawn, for every completed year of service or part thereof (in excess of six months).
- The amount of gratuity actually received.
- 20 lakhs.
- In the case of any other employees, the exemption would be worked out on the basis of the least of the following:
- One-half month’s salary for each completed year of service.
- Gratuity actually received.
- 20 lakhs.
If an employee, who has received gratuity in any earlier year from one employer, also receives gratuity from another employer in a later year, the aforesaid limit will be reduced by the amount of gratuity exempted from tax in any earlier year.
Relief in respect of Taxable Gratuity
Section 89 which provides for relief when salary, etc. is paid in arrears or in advance, can come to valuably assist a taxpayer in claiming further relief from income-tax. Such relief is computed under Section 89 read with Rule 21A(3).
Tax Liability of Legal Heirs
What happens in case of gratuity received by legal heirs upon death of an employee, who passes away while in active service? Would the exemption in such a case be governed by the monetary ceiling of Rs. 20 lakhs?
CBDT Circular No. 573 dated 21-08-1990 states that, “Clarifications have been sought from the Central Board of Direct Taxes whether a lump sum payment made gratuitously or by way of compensation or otherwise, to the widow or other legal heirs of an employee, who dies while still in active service, is taxable as income under the Income-tax Act, 1961. The issue has been examined by the Board and it is clarified that any such lump sum payment will not be taxable as income.”
The logical reasoning, for supporting the view that gratuity received by a widow or a legal heir of the deceased employee should not attract any tax, has been lucidly explained by the ITAT Madras Bench in its decision in the case of ‘Smt. L. K. Thangammal vs. ITO’ 1 ITD 762 (Mad.). Dealing with this situation, the Tribunal held that, “Gratuity will be includible in the assessment of the legal representative, only if it had accrued to the deceased before death. The right to receive gratuity arose on account of death and became payable thereafter and hence it was not includible in the widow’s hands as the legal representative of the deceased.”
