Gratuity is an appreciation for long-term service given by an employee to his employer. Although all gratuity is not subject to taxes. In India, gratuity received by government employees is entirely tax-exempt. For private-sector employees, The gratuity received are also tax exempt subject to certain conditions under the Income Tax Act. In this article, we will explain about section 10(10C) of Income Tax Act 1961 in detail.
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What is Section 10(10C) of Income Tax Act 1961?
Gratuity is a financial benefit provided by employers to his employee which is separate from the regular monthly salary. As per the Payment of Gratuity Act, 1972, gratuity is granted to employee upon the occurrence of certain events:
- Upon retirement or resignation
- Upon superannuation (retirement age)
- Upon death or disablement due to an accident or disease (5 minimum service requirement does not apply in these cases)
Employees must complete at least 5 years of service to be eligible for receiving the gratuity, and it is not available to interns or temporary staff. Section 10(10C) of Income Tax Act, 1961 allows for tax exemptions on amount received by an employee upon voluntary retirement or service termination.
Who is eligible for exemption under section 10(10C) of Income Tax Act?
The employees of the following entities are eligible to take the benefit of tax exemption under Section 10(10C) of Income Tax Act:
- Public sector companies
- Any other companies
- The Central Government
- State Governments
- Local authorities
- Authorities established under Central, State, or Provincial Acts
- Universities incorporated or established by or under a Central, State, or Provincial Act
- Universities recognized u/s 3 of University Grants Commission Act
- Indian Institutes of Technology
- Management institutions (as notified by the Central Government)
- Institutions of national or state importance (as notified by the Central Government)
What are the Conditions to claim exemption under Section 10(10C) of Income Tax Act 1961?
The following conditions are required to be fulfilled to claim exemption under Section 10(10C) of Income Tax Act 1961:
- Eligible Employers: The exemption applies to employees of above entities only.
- Nature of Payment: The amount received should be in the form of gratuity. It should not be salary arrears, leave encashment, or any other payment type.
- Mode of Receipt: The gratuity can be received as a lump sum or in installments. Both methods are eligible for the exemption.
- Minimum Period of Service: The employee must complete the minimum 5 years of service in these entities.
- Service Voluntary Retirement or Termination: The amount received must be due to voluntary retirement or service termination. The reason may also be voluntary separation scheme for public sector employees.
- Single Claim: The exemption can be claimed only once. If it has been claimed in a previous assessment year, it cannot be claimed again in any other year.
- Section 89 Relief: If the employee has taken the relief u/s 89 for the amount received on voluntary retirement or termination, he cannot claim the exemption under Section 10(10C) of Income Tax Act for the same or any other assessment year.
If the gratuity received exceeds the exemption limit, the excess amount is taxable as income tax slab rate. Additionally, if the employee has previously received gratuity from the same employer, the exemption limit will be reduced by the amount received earlier.
Exemption limit for Gratuity under Section 10(10C)
The amount of tax exemption for gratuity received depends upon whether the employee is from private sector or public sector.
1. Exemptions for gratuity received by government sector employees
Gratuity received by government sector employees upon termination, retirement, or superannuation is fully exempt from tax. This government sector employees include the employees of the central government, state government, defense sector, civil services, and other local authorities.
2. Exemptions for gratuity received by private sector employees
The amount of tax exemption on gratuity received by private sector employees depends on whether they are covered under the Payment of Gratuity Act or not.
a) Private Sector Employees Covered Under the Payment of Gratuity Act
Employees working in factories, mines, oil fields, ports, railways, plantations, shops, establishments, or educational institutions having 10 or more employees are entitled to gratuity. Once an employer falls under this act, the gratuity remains applicable even if the number of employees drops below 10.
The tax-exempt amount is the least of the following:
- Last salary (basic salary + DA) × number of years of employment × 15/26
- Actual gratuity received
- ₹20 lakhs
b) Private Sector Employees Not Covered Under the Payment of Gratuity Act
Private sector employers not covered by the Payment of Gratuity Act can still pay the gratuity to their employee. The gratuity amount is typically calculated on the basis on half a month’s salary for each completed year of service.
The tax-exempt amount is the least of the following:
- Last 10 months’ average salary (basic + DA) × number of years of employment × ½
- Actual gratuity received
- ₹20 lakhs
Exemption limit for Gratuity under Section 10(10C)
a) Calculation of the tax exempted amount of gratuity for private sector employees covered under payment of gratuity Act
Let’s say Ram’s last drawn salary (basic + DA) is ₹2 lakh per month. He has received a gratuity of ₹12 lakhs and has been employed for 20 years and 5 months.
Calculation of taxable gratuity and amount of tax exemption allowed under section 10(10C) of Income Tax Act 1961.
| Particulars | Amounts (₹) |
|---|---|
|
Amount of Leave encashment received (A)
|
XXXX
|
|
Less: Amount of exemption allowed under section 10(10AA)(ii) (Least of the below) |
(XXXX) |
|
1. Amount notified by govt (₹25,00,000)
|
XXXX
|
|
2. Actual amount of leave encashment
|
XXXX |
|
3. Average salary of last 10 months |
XXXX |
|
4. Salary per day *unutilized leave days for every year of completed service |
XXXX |
|
Leave encashment taxable (C=A–B) |
XXXX |
The number of years in service is rounded off to the nearest full year. Gratuity is calculated based on 15 days of salary for each completed year of service or part thereof which means 15/26 of the monthly salary.
b) Calculation of the tax exempted amount of gratuity for private sector employees not covered under payment of gratuity Act
Let’s say Ram’s average salary for the last 10 months is ₹1 lakh per month. He has received a gratuity of ₹14 lakhs and has been employed for 22 years and 2 months.
Calculation of taxable gratuity and amount of tax exemption allowed under section 10(10C) of Income Tax Act 1961
| Particulars | Amounts (₹) |
|---|---|
|
Amount of Leave encashment received (A)
|
XXXX
|
|
Less: Amount of exemption allowed under section 10(10AA)(ii) (Least of the below) |
(XXXX) |
|
1. Amount notified by govt (₹25,00,000)
|
XXXX
|
|
2. Actual amount of leave encashment
|
XXXX |
|
3. Average salary of last 10 months |
XXXX |
|
4. Salary per day *unutilized leave days for every year of completed service |
XXXX |
|
Leave encashment taxable (C=A–B) |
XXXX |
How to claim gratuity exemption in ITR?
The employees are required to follow these steps to claim an exemption under Section 10(10C) of income tax act:
- Step1: Submit Form I: The employee must submit Form I which is a declaration form required to submit to their employer at least 1 month before the date of retirement or resignation to claim the gratuity exemption.
- Step 2: Additional Required Documents: Along with Form I, the employee must provide the proof of gratuity received, last drawn salary and service period.
- Step 3: Employer Verification: Upon receiving these documents, the employer will verify the provided details and calculate the exemption allowed based on the formula mentioned earlier.
- Step 4: Payment of Gratuity: If the gratuity amount is within the exemption limit, the employer will pay the gratuity without deducting TDS. However If the gratuity amount exceeds the exemption limit, the employer will deduct TDS according to the income tax slab rate.
- Step 5: Form 16 and ITR Filing: Once the employee receives form 16, he must report the exempted gratuity amount in the exempted allowance section of salary head in his Income Tax Return.
Taxability of gratuity in case of death of employee
When an employee dies, the gratuity received by their legal heir or nominee is fully exempt in their hands from income tax, without any upper limit. However, if the gratuity is received in installments by the legal heir or nominee, the exemption limit is calculated on the basis of the number of years the deceased employee served.
Read also: Section 10(10CC) of Income Tax Act 1961 – Tax Paid by Employer on Non-Monetary Perquisites
Final Words
To claim the tax exemption under Section 10(10C) of Income Tax Act, the gratuity amount received on voluntary retirement or termination must fulfill the specific conditions related to the type of employer, scheme guidelines, and exemption limits. Also, the exemption can be claimed only once and cannot be claimed if relief has already been allowed under Section 89.
Frequently Asked Questions (FAQ)
Gratuity exemption can only be claimed once per employer, however there is no limit on the number of employers for whom an employee can claim this exemption.
You need to report the total gratuity amount you received (both exempted and taxable portions) under the ‘Salaries’ head of your ITR. You can specify the portion of exempted gratuity under the section ‘Income exempt under section 10’.
Gratuity is an amount given to employees upon retirement, resignation, or death. While it is generally considered a retirement benefit. Yes it is taxable up to certain limits.