Death-cum-Retirement Gratuity received by an employee [Section 10(10)]

Exempted Incomes-Section 10(10)

Death-cum-Retirement Gratuity is an important financial benefit provided to employees in India. It is governed by Section 10(10) of the Income Tax Act, 1961. In this blog post, we will explore the details of Death-cum-Retirement Gratuity and how it impacts employees.

What is Death-cum-Retirement Gratuity?

Death-cum-Retirement Gratuity is a lump sum amount paid by an employer to an employee as a token of appreciation for the employee’s long and meritorious service. It is usually paid at the time of retirement or death of the employee.

Tax Implications

Section 10(10) of the Income Tax Act provides certain exemptions for Death-cum-Retirement Gratuity. According to this section, the gratuity received by a government employee is fully exempt from tax. For non-government employees, the exemption is limited to the least of the following:

  • Actual gratuity received
  • 15 days’ salary for each completed year of service
  • 20 lakh

Calculation of Death-cum-Retirement Gratuity

The calculation of Death-cum-Retirement Gratuity is based on the employee’s last drawn salary and the number of years of service. The formula for calculating gratuity is:

[Gratuity = (Last Drawn Salary * Number of Years of Service * 15) / 26]

Important Points to Note

Here are some important points to note about Death-cum-Retirement Gratuity:

  • Gratuity is applicable to employees who have completed at least 5 years of continuous service.
  • Gratuity is tax-free up to a certain limit as mentioned in Section 10(10).
  • Gratuity is payable to the nominee or legal heir in case of the employee’s death.
  • Gratuity is an important component of an employee’s retirement benefits and should be factored in while planning for retirement.
  • Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. Gratuity can either be received by:
See also  Clubbing of Income – Section 60 to 65

Exemption of Gratuity under Section 10(10)

Government Employees & employees of local
authority
Employees covered under Gratuity Act Any other employee
Fully exempt Minimum of the following 3 limits:

(1) Actual gratuity received, or

(2) 15 days’ salary for every completed year, or part thereof exceeding six months 7 days’ salary for each season in case of employee in seasonal establishment; or

(3) Rs. 20,00,000

Meaning of Salary:

(i) Basic Salary plus dearness allowance.

(ii) Last drawn salary. Average salary for preceding 3 months in case of piece rates employees

(iii) No. of days in a month to be taken as 26

Minimum of the following 3 limits:

(1) Actual gratuity received

(2) Half months’ average salary of each completed year of service.

(3)  Rs. 20,00,000

Meaning of Salary:

(i) Basic salary plus D.A. to the extent the terms of employment so provide Commission, if fixed percentage of turnover.

(ii) Average salary of last 10 months preceding the month in which event occurs.

(iii) Only completed year of service is to be taken.

(i)         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 under section 89 on account of such gratuity.

(ii)        Where an employee had received gratuity in any earlier year(s) and had claimed exemptions 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. 20,00,000 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.

(iii)       If gratuity is received from more than one employer in the same previous year, by an employee, the limit of Rs. 20,00,000 would apply to the aggregate of gratuity received from one or more employers.

(iv)       Gratuity is exempt. if the relationship of employer and employee exists between the payer and the 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.

(v)        The words “completed service” occurring in section 10(10) should be interpreted to mean an employee’s total service under different employers including the employer other than the one from whose service he retired, for the purpose of calculation of period of years of his completed service, provided he was not paid gratuity by the former employer. [CIT v PM Mehra (1993) 201 ITR 930 (Born)].

(vi)       Any gratuity paid to an employee, while he continues to remain in service with the same employer is taxable under the head “Salaries” because gratuity is exempt only on retirement or on his becoming incapacitated or on termination of his employment or death of the employee. In this case, however the assessee can claim relief under section 89.

(vii)      The CBDT vide its instruction in F. No. 194/0/73-IT, dated 19.6.1973 has clarified that the expression “termination of employment” would cover an employee who has resigned from the service.

Examples:

Here are some examples of how the tax treatment of death-cum-retirement gratuity would apply in practice:

  1. An employee of a government department who dies in service would be eligible for a death-cum-retirement gratuity. The entire amount of the gratuity would be exempt from income tax in the hands of the employee’s legal heirs.
  2. An employee of a private company who retires after 25 years of service would be eligible for a death-cum-retirement gratuity. The gratuity would be exempt from income tax up to the lower of 15 days’ salary for each completed year of service or ₹20 lakhs. If the gratuity exceeds the exempt limit, then the excess amount would be taxable as income from salaries.
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