Gratuity Exemption Rules
Gratuities are bonuses paid to employees by employers in exchange for the services they provide. When the employee retires or resigns, it is paid if he or she has worked for the company continuously for at least five years. It is waived in certain cases, such as death or disability, for continuous 5-year service.
You will gain a comprehensive understanding of gratuity payments in India with this article, which covers every aspect of the same in detail. Let’s begin.
What is a gratuity payment?
If you believe you are eligible for gratuities from your past employer, without much ado, read on to find out how you can go about it and what to expect. The blog will also discuss the gratuity statute, the eligibility requirements for employees, formulas for gratuity calculation, as well as taxation restrictions.
To Whom Are Gratuities Available?
Employees who have been with the company for at least five years are entitled to gratuities. Generally, employees are entitled to gratuities at all times. However, these regulations can be eased in the event of early death or disability.
Tax Exemption Rules on Gratuities: How Do They Work?
- A firm typically pays its gratuity out of its budget or purchases group insurance for its employees, as opposed to their Provident Fund which includes their contributions.
- The Payment of Gratuity Act, 1972, provides a superannuation benefit to employees who leave companies with more than ten workers by calculating a fixed portion of the salary and depositing it in a gratuity account.
- Gratuities are paid upon resignation, retirement, superannuation, layoff, voluntary retirement, death, reduction, or disability, and termination. If the employee dies, his/her nominee receives the funds.
Is there a maximum gratuity amount?
Under the Gratuity Act of 1972, employees are eligible to receive loyalty rewards only after five years of regular work. A single employee is allowed to receive a maximum of £20 lakh in gratuity.
Is there an income tax on gratuity payments?
- Currently, gratuities are taxable under income tax returns laws as they are considered part of an individual’s wages. However, this tax is restricted since the government provides tax exemptions on gratuities earned in certain circumstances. Due to their classification as “Income from other sources,” bonuses received by a nominee/heir on the death of an employee must be taxed.
- Exemptions for government employees’ gratuities from income tax
- A gratuity paid by a government employee on their retirement, superannuation, or termination is tax-free under current law. Government workers, those in the defence industry, as well as employees in other fields, such as local authorities, are covered by this.
- Private-sector employee gratuity tax exemptions
- Depending on whether private-sector employees are covered by the Payment of Gratuity Act of 1972, they are eligible for different tax treatment on gratuities.
Private Sector Employees Who Are Covered by the Gratuity Act
In some cases, employees covered by the Act are entitled to a tax-free gratuity. An employee can receive a gratuity for every year that is tax-free for up to 10 lakhs or a salary equivalent to 15 days of service or an actual gratuity paid for that year. Gratuities that exceed the exemption limit will be taxed according to existing rules.
The Act does not cover the following private sector employees
For employees not covered by the Payment of Gratuity Act, exceptions must include at least one of the following:
- Full gratuity received
- A bonus of ten lakh rupees
- Upon completion of each year of service, a sum equal to half a month’s income is paid.
- As mentioned earlier, any amount over the minimum will be taxed.
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