In respect of other employees, it is to be determined whether they receive gratuity from an employer covered under the Payment of Gratuity Act, 1972 or not. It is pertinent to note that every gratuity payment received by an employee is not exempt from tax per se. In this context, it is important to note the provisions of the Payment of Gratuity Act, 1972 read with the Income Tax Act, 1961
Any gratuity received by an employee from an employer covered under the Payment of Gratuity Act, 1972 to the extent it does not exceed an amount calculated in accordance with the provisions of the Gratuity Act is not taxable. Recently, the government increased the limit from Rs 3.5 lakh to Rs 10 lakh w.e.f. 24 May 2010.
Organisations covered under Gratuity Act
The Gratuity Act applies to every factory, mine, oilfield, plantation, port and railway company. It also applies to every shop or establishment covered under the Shops and Establishments Act/regulations of a state, in which 10 or more persons are employed or were employed on any day of the preceding 12 months. Further, it also applies to such other shop or establishment, as the central government may prescribe. A shop or establishment to which the Payment of Gratuity Act becomes applicable would continue to be covered, even if the number of persons employed by it subsequently falls below 10.
When is gratuity payable?
Gratuity is payable to an employee on the termination of employment after he has rendered continuous service for not less than five years or such other time as prescribed in respect of the specified industries/sectors.
Termination of employment may be on account of superannuation or retirement or resignation or death or disablement due to accident or disease. In the unfortunate event of death or disablement, the aforesaid time limit is waived off.
Amount of gratuity
The gratuity is to be computed at the rate of 15 days of wages last drawn by the employee for every completed year of service or part thereof in excess of six months. In case of employees earning monthly wages, the month is reckoned to be of 26 days and computation is to be done accordingly.
Certain other computation methods are prescribed for few specific industries/sectors. Till recently, the amount of gratuity payable to an employee was not to exceed Rs 3.5 lakh. This limit has been revised to Rs 10 lakh.
Gratuity received by other staff
In case of gratuity received by employees, other than under the Payment of Gratuity Act, the amount is not taxable to the extent of the prescribed limits as per the provisions of the Income Tax Act.
There was an expectation that limits of gratuity under the Payment of Gratuity Act would be revised retrospectively to provide parity in comparison with the enhanced gratuity received by the government employees as per the recommendations of the Sixth Pay Commission.
It is, however, important to note that these limits have not been revised with retrospective effect. Therefore, the enhanced limit under the Gratuity Act would only apply after the specified date and the erstwhile limit would apply for the earlier period.