7th Pay Commission: Gratuity ceiling doubled to Rs 20 lakh-Zeenews 29th June 2016
The Union Cabinet on Wednesday approved the pay panel recommendation of doubling ceiling of gratuity from Rs 10 lakh to Rs 20 lakh.
Know Your Gratuity Benefits And Income Tax Exemption Rules-NDTV 19th June 2016
dkj
Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. An employee gets gratuity when he/she resigns, retires or is laid off.
dkj
Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. An employee gets gratuity when he/she resigns, retires or is laid off.
In case of death or disablement there is no minimum eligibility period.
How Gratuity is Calculated
The gratuity amount depends upon the tenure of service and last drawn salary. It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.
The gratuity amount depends upon the tenure of service and last drawn salary. It is calculated according to this formula: Last drawn salary (basic salary plus dearness allowance) X number of completed years of service X 15/26.
According to this formula, the time period of over six months or more is considered as one year.
This means if you have completed five years and seven months of service, the number of years would be considered as six years for calculation of gratuity benefit.
On the other hand, if the service period is five years and five months, for gratuity calculation it will be considered five years.
An employer can however give higher gratuity than the amount under the prescribed formula.
Maximum Amount
For government employees, Rs 10 lakh is the maximum amount that can be paid as gratuity. The Seventh Pay Commission has recommended increase in the gratuity ceiling to Rs 20 lakh from the current level of Rs 10 lakh.
Income Tax Treatment of Gratuity
For government employees, entire amount of gratuity received on retirement or death is currently exempted from income tax.
In case of non-government employees, income tax rules on gratuity are applicable depending on whether employees are covered under the Payment of Gratuity Act, 1972 or not.
For non-government employees covered under the Gratuity Act, the income tax exemption on any gratuity received is least of the following:
⦁ Maximum amount specified by the government which is currently Rs 10 lakh
⦁ Last drawn salary X 15/26 X years of service
⦁ Actual gratuity received
For example, the last drawn salary (basic plus DA) of Mr Ashish, for example, is Rs 60,000 (per month) and he has worked for 25 years. The gratuity according to the formula is Rs 8.65 lakh but suppose he has actually received gratuity of Rs 12 lakh.
So for income tax calculation, Rs. 8.65 lakh will be considered for exemption. So Mr Ashish will pay tax on Rs 3.35 lakh (Rs. 12 lakh - 8.65 lakh).
For non-government employees not covered under the Payment of Gratuity Act, the income tax exemption on any gratuity received is least of the following:
⦁ Half month's average salary for each completed year of service
⦁ Maximum amount specified by the government which is currently Rs 10 lakh
⦁ Actual gratuity received
(Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month (not the day) of retirement)
⦁ Half month's average salary for each completed year of service
⦁ Maximum amount specified by the government which is currently Rs 10 lakh
⦁ Actual gratuity received
(Average monthly salary is to be computed on the basis of average of salary for 10 months immediately preceding the month (not the day) of retirement)
For example, the last drawn salary (basic plus DA) of Mr Bhupesh, for example, is Rs 70,000 and he has worked for 35 years. The gratuity according to the formula is Rs 12.25 lakh and he has received this amount as gratuity. For tax purposes, Rs 10 lakh would be considered as exemption limit as it is the lowest of the three factors. So Mr Bhupesh will have to pay tax on Rs 2.25 lakh (Rs 12.25 lakh - Rs 10 lakh).
What is Gratuity?
(Business Standard 9th May 2013
Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company
Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company
Gratuity is one of the least understood components of salary. InvestmentYogi explains everything about Gratuity and the tax implications for you.
Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. Gratuity is a defined benefit plan and is one of the many retirement benefits offered by the employer to the employee upon leaving his job. An employee may leave his job for various reasons, such as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way of voluntary retirement.
Eligibility
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or more years of full time service with the employer(minimum 240 days a year).
How does it work?
An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer chooses a life insurer, he has to pay annual contributions as decided by the insurer. The employee is also free to make contributions to his gratuity fund. The gratuity will be paid by the insurer based upon the terms of the group gratuity scheme.
Tax treatment of gratuity
The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. This tax treatment varies for different categories of individual assessees. We shall discuss the tax treatment of gratuity for each assessee in detail.
For the purpose of calculation of exempt gratuity, employees may be divided into 3 categories –
⦁ Government employees and
⦁ Non-government employees covered under the Payment of Gratuity Act, 1972
⦁ Non-government employees not covered under the Payment of Gratuity Act, 1972
⦁ Non-government employees covered under the Payment of Gratuity Act, 1972
⦁ Non-government employees not covered under the Payment of Gratuity Act, 1972
In case of government employees – they are fully exempt from receipt of gratuity.
In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:
1. Actual gratuity received;
2. Rs 10,00,000;
3. 15 days’ salary for each completed year of service or part thereof
Note:
⦁ Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
⦁ ‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored.
⦁ Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:
1. Actual gratuity received;
2. Rs 10,00,000;
3. 15 days’ salary for each completed year of service or part thereof
Note:
⦁ Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
⦁ ‘Completed year of service or part thereof’ means: full time service of > 6 months is considered as 1 completed year of service; < 6 months is ignored.
⦁ Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26
⦁ In case of non-government employees not covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of the 3 below:
1. Actual gratuity received;
2. Rs 10,00,000;
3. Half-month’s average salary for each completed year of service (no part thereof)
Note:
⦁ Here, salary = basic + DA + commission (if it’s a fixed % of sales turnover).
⦁ Completed year of service (no part thereof) means: full time service of > 1 year is considered as 1 completed year of service. < 1 year is ignored.
⦁ Average salary =10 months’ salary (immediately preceding the month of leaving the job)/10
Illustration
Let’s understand the above math clearly with an example:
Varun had been working with an IT company since past 10 years, 7 months. He is retiring on 15th April, 2010. His current Basic = Rs 40,000 pm, DA = Rs 5,000 pm. He is going to receive a gratuity amount of Rs 3 lakhs on retirement. Note: Varun’s basic and DA have been the same since past 1 year.
Lets consider 2 situations here – (a) Varun’s employer is covered under Payment of Gratuity Act, 1972; and (b) Varun’s employer is not covered under Payment of Gratuity Act, 1972.
• Salary = Basic + DA = Rs 40,000 pm + Rs 5,000 pm = Rs 45,000 pm
• Average salary = 10 months’ salary (immediately preceding the month of leaving the job)/10 = (Rs 45,000 pm * 10)/10 = Rs 45,000 pm. Therefore, half-month’s average salary is = Rs 45,000/2
Important points to remember
• Generally, only government employers give DA to their employees. Above example is only for illustrative purpose.
• The salary of the employee may differ over a period of time on account of change in basic, DA and/or other factors.
• In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10,00,000.
• Where employee has already claimed gratuity exemption in any previous year (s), the maximum exemption amount allowed for the current previous year i.e. Rs 10,00,000 will be reduced by the amount of deduction already claimed in the previous years.
• In case of an employee who is employed in a seasonal establishment ( not employed throughout the year), the gratuity exemption shall be for seven days wages for each season.
No comments:
Post a Comment