Taxability of Gratuity in various cases

Gratuity is a ‘Salary’ income and any amount received as Gratuity is added to income for that year under the head “Income from Salary” and it is payable to the employee only after the completion of 5 years of continous service in the organization.

Exemption of Gratuity is also available under section 10(10) of the Income Tax (IT) Act, 1961 and assessee claim exemption of the same as per the provisions of the Income tax act.  Here, are some  relevant points regarding gratuity or we can say taxability of Gratuity in various cases.

• Where an assessee receives gratuity and part of it is taxable because it is not fully exempt under section 10(10), the employee can claim relief u/s 89 on account of such gratuity.

• Where an employee had received Gratuity in earlier year(s) and had claimed exemption under section 10(10) in respect of the gratuity received earlier also, he will still be entitled to this exemption but the limit which at present is Rs. 10,00,000 shall be reduced by the amount of exemption(s) availed in the earlier year(s). There will be no change in the other two limits.

• If gratuity is received from more than one employer in the same previous year, by an employee, the limit of Rs. 10,00,000 would apply to the aggregate of gratuity received from one or more employers.

• Gratuity is exempt, if the relationship of employer and employee exists between the payer and payee. If such relationship does not exist, the exemption shall not be available, e.g., gratuity payable by the LIC of India to its Insurance Agents does not qualify for exemption as agents are not employees of the Corporation.

• Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head “Income from Salary” because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. However, in this case the assessee can claim relief u/s 89.

• Where an assessee retires and earns gratuity from his employer and the same employer offers him a job under a fresh agreement which provides for payment of gratuity, the gratuity paid at the time of retirement under the earlier agreement is entitled to exemption in respect of the gratuity even if he is re-employed by the same employer under a fresh agreement.

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