Employees within the coverage of Payment of Gratuity Act, 1972 (the Act) or otherwise if being provided by their organization for the same are entitled to receive gratuity after rendering 5 years of continuous service. Generally, the payment is made on retirement or death of an employee (to legal heirs) but it can also be encashed in case of resignation or termination or during service. At present, the maximum ceiling for the purpose as per the Act is Rs. 10 lakhs.
Even then employees may receive gratuity at a higher rate than prescribed under the Act. This is supported by Sec. 4(5) of the Act which protects gratuity if it is at a rate better than that provided under the Act. Such higher payment of gratuity may be affected through any award or agreement or contract with the employer. Delhi High Court’s through its judgement in the case of SAIL Ex-Employee’s Association vs. Steel Authority of India & Another (LLR, Delhi HC 1312) has also granted legal sanction to agreements to this effect.
Any death cum retirement gratuity is exempt from tax to the extent of the least of the following:
- 15 days salary, based on salary last drawn for every completed year of service or part thereof in excess of 6 months
- Rs.10,00,000
- Gratuity actually received
Thus, gratuity in excess of the above limits is taxable in the hands of the assessee. Also any gratuity paid to an employee while in service is not exempt from tax. However, the assessee can claim relief under section 89.
Also Check: Other Legal Aspects
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