Exemption of gratuity amount. if paid before 5 years.

This query is : Resolved

Manish Aneja (Querist)
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22 May 2012 Dear Experts,

Our company is covered under "Payment of Gratuity Act 1972" as there are more than 20 employees.
There is policy to pay Gratuity at the time of full & final payment of salary, if an employee resigns after completion of 3 years of service.

My query is about exemption of Gratuity paid after completion of 3 years of service but before 5 years.

Please advise, if we should provide exemption to employee who left the company before 5 years of service and got Gratuity payment as per company policy.

V K Bajaj

V K Bajaj (Expert)
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23 May 2012 The amount paid should have been mentioned in your answer.

However, exempted up to 3.5 lakhs.

Manish Aneja

Manish Aneja (Querist)
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24 May 2012 Thank you Mr. Bajaj,

Please also let me know the section, under which it is exempted up to Rs.3.5 lakhs.
As per my knowledge:-
1.Section 10(10)(i) is for Government Employees.
2.Section 10(10)(ii) is for employees covered under Payment of Gratuity Act 1972.
3.Section 10(10)(iii) is for all other employees except above two.

And maximum exemption limit is Rs.10 lakhs.
Please keep in mind that this payment is before completion of 5 years.

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)
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21 July 2024 Under the Income Tax Act, 1961, gratuity received by an employee is taxable as per certain exemptions specified under Section 10(10) based on the employment category and years of service. Here’s how it applies to your query:

1. **Section 10(10)(ii)**: This section applies to employees covered under the Payment of Gratuity Act, 1972. According to this section:
- If an employee receives gratuity from an employer covered under the Gratuity Act, the exemption is available based on the following formula: \( \text{Exemption} = \frac{15 \times \text{last drawn salary} \times \text{completed years of service}}{26} \).
- The exemption is subject to a maximum limit, currently set at Rs. 20 lakhs effective from 29th March 2018.
- For employees not covered under the Payment of Gratuity Act, the exemption under Section 10(10)(iii) is limited to Rs. 10 lakhs.

2. **Exemption Conditions**:
- For employees covered under the Act, the gratuity is exempt up to the limit specified regardless of the duration of employment, as long as the payment meets the conditions under the Act.
- If an employee resigns or leaves the company before completing 5 years of service, the gratuity received is still eligible for exemption under Section 10(10)(ii) of the Income Tax Act, subject to the maximum exemption limit of Rs. 20 lakhs.

3. **Tax Treatment**:
- Any gratuity received that exceeds the exemption limit is taxable as per the employee's income tax slab rate.
- The exemption is not contingent on the completion of 5 years of service but is capped at the prescribed limit.

Given these points, if your company pays gratuity to employees who resign after completing 3 years of service but before completing 5 years, the gratuity amount received by them would still be eligible for exemption under Section 10(10)(ii) of the Income Tax Act, subject to the maximum limit of Rs. 20 lakhs. Ensure that the gratuity calculation adheres to the formula and conditions specified under the Act to determine the exempt amount accurately.

For specific details and applicability to your company's policies, it’s advisable to consult with a qualified tax advisor or chartered accountant who can provide guidance tailored to your company's circumstances and ensure compliance with tax laws.

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