I have recently retired from an MNC. The company pays gratuity to the management staff at the rate of one month basic salary for every year of service subject to a ceiling of 20 months. It appears that the scheme is not covered under the Payment of Gratuity Act. On this basis, the gratuity amount is paid to the retirees. But while calculating the tax exempt gratuity amount, they follow the calculation according to the following norms. The average basic salary of the 10 months preceding the last month (may be to facilitate payment of gratuity amount on the retirement day ) , say A is taken and tax exempt amount is calculated as A times the number of completed years of service , omitting the fraction even if more than 6 months times 15/30.
Whereas I understand that it should be the average of 10 months' salary including the last month times the number of years of service, increased by one year if the fractional service is more than six months times 15 /26 .
When calculated according to the company's method, the tax outgo is more by about Rs 12,000.
Kindly confirm, whether the stand of the company is correct in calculating the tax exempt amount. Please indicate the I-T clause also.
— Jagannathan.R
As informed by you, since your employer is not covered under the Payment of Gratuity Act (POGA) and you have received gratuity under a scheme not covered under POGA, the amount exempt from tax should be computed according to the provisions of section 10(10)(iii) of the Income tax Act, 1961. The exemption amount should be least of the following:
Half's month average salary for each completed year of service. The average monthly salary shall be calculated on the basis of the average salary of 10 months immediately preceding the month in which an individual had retired; or
Statutorily prescribed cap of Rs 10, 00,000; or
actual gratuity received.
According to the aforesaid provisions, while computing the amount to be claimed as exempt from tax in respect of gratuity, the average monthly salary has to be calculated on the basis of average salary of 10 months immediately preceding the month in which an individual has retired and not the month in which an individual has retired.
Further, unlike the provisions of POGA, which clearly states that while calculating the amount of gratuity as exempt from tax, every completed year of service or part thereof in excess of six months has to be considered, the words used in section 10(10)(iii) of the Act are half month's average salary to be calculated for each completed year of service. Generally, in such cases, where a reference to completed year of service is made, a fraction of a year is ignored.
It seems that your employer has computed the amount to be exempt from tax according to the provisions of section 10(10)(iii) of the Act by considering the average monthly salary on the basis of the average salary of 10 months immediately preceding the month in which you had retired and ignoring fraction of a year. Any gratuity amount received in excess of above prescribed limit shall be taxable in your hands as salary.
It needs to be ensured that the term salary includes basic salary and dearness allowance, if the terms of employment so provide, but excludes other allowances and perquisites. Further, in case, you have received any gratuity in any of the earlier FYs from your former employer(s), the prescribed limit of Rs 10,00,000 should be reduced by the amount of gratuity considered as exempt from tax in any of such previous FYs. In case, your employer is governed by the provisions of POGA, the amount of exemption should be computed according to the provisions of section 10(10)(ii) of the Act, subject to prescribed conditions.
