If you want to know the gratuity tax applicable on the gratuity amount you receive, you're at the right place. Read on to know more!
Is Retirement Gratuity Taxable in India: Gratuity is a common term used for the payment of gratuity to employees in India. It is also called “Compensatory allowance” or “compensation”. The amount may vary from one organization to another according to their own rules and regulations. Gratuity Taxable can be paid in cash or by cheque/DD etc.
In this article, we will discuss who is eligible for the gratuity payment and you will also know about the Gratuity Taxable to the amount you receive.
What Is Gratuity?
Gratuity is a special type of payment that can be made to employees for services rendered. The gratuity received by the employee should not exceed the amount of his/her salary and wages. In case an employee has been given more than what he/she was entitled to, it will be considered theft or embezzlement.
The gratuity rules in India are governed by the Gratuity Act of 1972.
The Gratuity Act of 1972 is a federal law that provides for payment of gratuities to certain employees who are not covered by any other employee benefit plan. The act applies to all employers with 25 or more employees, including state and local governments. It also covers self-employed and independent contractors. Under this law, an employer must pay gratuities in cash as soon as possible after the end of each calendar quarter.
A gratuity is a money paid voluntarily by an employee to his or her employer at the time of separation from employment. If you are eligible for gratuity your employer has to pay the gratuity amount. Even if the employee declares bankruptcy the gratuity amount will be due and you will receive it.
How Does Gratuity Work?
Gratuity is a social security benefit for employees in India. It is a lump sum payment made by an employer to an employee at the time of retirement, resignation or termination of employment. The amount of gratuity is calculated based on the employee’s last drawn salary and the number of years of service completed with the employer. The Payment of Gratuity Act, 1972, governs the payment of gratuities to employees in India.
Impact of the Amendment on Gratuity
The Payment of Gratuity (Amendment) Act, 2018, came into force on March 29, 2018, and brought two significant changes for employees.
- Firstly, the amendment doubled the gratuity limit from INR 10,00,000 to INR 20,00,000
- Secondly, the amendment removed the upper cap of the maximum amount of gratuity payable, which was set at INR 10 lakh in 2010.
The amendment aims to ensure harmony among employees in the private sector and in public sector undertakings/autonomous organizations under the government who are not covered under CCS (Pension) Rules.
Is Gratuity Taxable in India?
Gratuity is provided by the employer to the employee and is based on their service period under the company. However, the government has some rules regarding the taxation of this gratuity amount.
Some of the rules about gratuity taxation applicable are:
- If the employee works at a government organization whether it is a central state or local government the gratuity received is completely exempted from the tax.
- If the employee works at a Private company the maximum gratuity that they can receive without any tax is ₹20 lacs. If the gratuity they receive is less than this amount then this is exempted from the tax however if it exceeds the amount they have to pay taxes on the gratuity received.
There are several ways to save the taxes on the gratuity you receive. You can contact Vakilsearch and their team of experts will help you and guide you with the taxation process. They will also tell you about the Gratuity Taxable to the amount you receive. You can contact them on their official website and fill out the form. The lawyer will reach out to you and solve all your queries.
Who Is Eligible for Gratuity Tax Exemption in India?
The Gratuity Act of 1972, which was passed by the Parliament in India, is a law that provides gratuity to employees who die or are injured on the job. The act also allows for compensation to be paid to their families if they have died due to an accident at work.
If you are employed by any company and you suffer an injury or death while working there, your employer must pay you a certain amount of money as gratuity. This amount varies depending on how long you have been employed with them and what your salary was.
Here are the eligibility criteria for receiving gratuity:
- An employee who has worked for continuous 5 years under the same employer is eligible to receive Gratuity.
- If an employee is offered superannuation he or she is eligible to receive gratuity.
- If the employee is retired they are eligible for gratuity.
- If a worker dies or gets injured during work they deserve gratuity.
- If the employee dies or suffers from disability due to any incident, gratuity is supposed to be paid to them by the employer.
If you want to calculate the amount of Gratuity that you are eligible for you can use the Gratuity calculator available on the website of Vakil search. You just have to enter the years of service that you have provided to the company and the monthly salary you receive. The monthly salary here includes the basic salary plus the allowance that is provided to you. By providing this basic information you will be able to calculate the Gratuity that you are eligible for.
Who Can Enjoy The Benefit of Gratuity?
The Payment of Gratuity Act, 1972, applies to all establishments employing ten or more persons. The act covers employees who have completed at least five years of continuous service with the employer. However, the act does not apply to apprentices and employees who have been terminated for misconduct.
The amendment has ensured that employees in the private sector and in public sector undertakings/autonomous organizations under the government who are not covered under CCS (Pension) Rules are entitled to receive a higher amount of gratuity at par with their counterparts in the government sector
Gratuity Payment Rules in India
Gratuity payment in India follows some basic rules and regulations. These rules are the foundation upon which the gratuity is paid by the employers to the Employees. The amount of Gratuity paid is usually dependent upon the salary of the employee and the surface period for which they have worked with the company.
Some important payment rules in India for gratuity are as follows:
- If an employee resigns or retires they are paid the Gratuity amount whereas if the employee faces a timely death the nominee mentioned by them receives the graduate amount.
- The Gratuity act of 1972 mentions that the maximum gratuity that an employee can receive is rupees 10 lakhs. However, the employees can increase this amount by adding the payment as a bonus or performance incentive etc.
- Although gratuity is different from the base salary, it is taxable under the law. However, the government provides some tax exemptions to the gratuity amount.
- If an employee works in the private sector Rs 20 lakhs from their gratuity is exempted from tax, or if the gratuity is less than that amount the gratuity received is exempted from tax.
- To be eligible to receive gratuity the employee must have worked for at least 5 years under the same employer.
Conclusion – Is Retirement Gratuity Taxable in India
Gratuity is the amount that is paid by the employer or the company to the employee that has worked with them for more than 5 years. This amount is paid to the Employees when they retire or face an untimely death, disability or injury during work. The gratuity amount is also paid in case the employee is declared superannuated.
If you want to calculate your gratuity amount or the gratuity taxable in India to it, you can use the free gratuity calculator available on Vakilsearch. The calculator will tell you the amount of gratuity that you will receive according to your base salary and the service period you have worked for.
FAQs
1. Is gratuity fully exempt from tax?
No, gratuity is not fully exempt from tax. While there are certain exemptions and deductions available, a portion of the gratuity amount may be subject to tax.
2. Is gratuity taxable under the new tax regime?
Yes, gratuity is taxable under the new tax regime. However, the tax treatment of gratuity may vary depending on the specific circumstances of the employee and the employer.
3. What is gratuity and who is eligible for it?
Gratuity is a lump sum payment made by an employer to an employee as a form of gratitude for their services. In India, gratuity is governed by the Payment of Gratuity Act, 1972, and is available to employees who have completed at least five years of continuous service with the same employer.
4. How is gratuity calculated in India?
Gratuity is calculated based on the employee's last drawn salary and the number of years of service completed with the employer. The formula for calculating gratuity is as follows: 15 * Your last drawn salary * the working tenure) / 30.
5. Is there a maximum limit for tax-free gratuity?
Yes, there is a maximum limit for tax-free gratuity. Currently, the maximum limit for tax-free gratuity is Rs. 20 lakhs, as per the provisions of the Payment of Gratuity Act, 1972.
6. Are there any exceptions to gratuity taxation?
Yes, there are certain exceptions to gratuity taxation. For example, gratuity received by the family members of a deceased employee is fully exempt from tax. Additionally, gratuity received by employees of the Indian government, state government, or local authorities is fully exempt from tax.
7. What is the tax treatment of gratuity for government employees?
Gratuity received by employees of the Indian government, state government, or local authorities is fully exempt from tax. This exemption applies to both civil servants and defence personnel.
8. Is there a difference in gratuity taxation for private and public sector employees?
No, there is no difference in gratuity taxation for private and public sector employees. The tax treatment of gratuity is the same for all employees, regardless of whether they work in the private or public sector.
9. What are the reporting and documentation requirements for gratuity taxation?
Employers are required to report the gratuity paid to employees in their annual tax returns. Employees are also required to report any gratuity received in their personal tax returns. Additionally, employers are required to issue a Form 16 to employees that includes details of the gratuity paid.
10. Can I claim a tax deduction for the gratuity received?
No, you cannot claim a tax deduction for the gratuity received. However, if you have received any gratuity in excess of the tax-free limit, you may be able to claim a tax deduction for the tax paid on the excess amount.
Also Read:
