GratuityCompensation Management

Prepared By

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Manu Melwin JoyAssistant Professor

Ilahia School of Management Studies

Kerala, India.Phone – 9744551114

Mail – manu_melwinjoy@yahoo.com

Gratuity

• 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

• 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.

Gratuity

• 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.

Gratuity

• 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).

Gratuity

• 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.

Gratuity• How does it work?– 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’.

Tax treatment of gratuity• For the purpose of

calculation of exempt gratuity, employees may be divided into 3 categories –– (a) Government employees– (b)Non-government

employees covered under the Payment of Gratuity Act, 1972

– (c)Non-government employees not covered under the Payment of Gratuity Act, 1972

Tax treatment of gratuity• n 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:– (i) Actual gratuity received;– (ii) Rs 10,00,000;– (iii) 15 days’ salary for each

completed year of service or part thereof

Tax treatment of gratuity• 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

Tax treatment of gratuity• 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:

• (i) Actual gratuity received;• (ii) Rs 10,00,000;• (iii) Half-month’s average salary

for each completed year of service (no part thereof)

Tax treatment of gratuity• 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

Tax treatment of gratuity

• 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.

Tax treatment of gratuity• 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.

Tax treatment of gratuity