Gratuity

Tax Treatments of Gratuity are as under:

Gratuity received	Treatment	Remarks
A. During service tenure	Fully taxable [Sec. 17(1)(iii)]
B. At retirement employee of:
Government	Fully exempted [Sec. 10(10)(i)]
Local authority	Fully exempted [Sec. 10(10)(i)]
Any other Employer
i) Covered by Payment of Gratuity Act	Minimum of the following shall be exempted from tax u/s 10(10)(ii): Actual Gratuity received; Rs.1000000; [15 / 26 * Completed year of service * Salary p.m.]	Completed year of service includes any fraction in excess of 6 months. Salary means Basic + DA (forming part of retirement benefit), last drawn Seven (instead of 15) working days in case of employees of seasonal establishment In case of piece-rated employees, salary shall be calculated by applying average of last three months wages immediately preceding his termination. The statutory limit of Rs.350000/- has been raised to Rs.10 lakh for an employee who retire or become incapacitated prior to such retirement or die on or after the 24^th day of May, 2010 or whose employment is terminated on or after the said date
ii) Not covered by Payment of Gratuity Act	Minimum of the following shall be exempted from tax u/s 10(10)(iii) Actual Gratuity received; Rs.1000000; 1 / 2 * Completed year of service * Average Salary p.m.	Completed year of service ignores any fraction of month. Average Salary here means, Basic + DA (forming part of retirement benefit) + Commission (as a fixed percentage on turnover) being last 10 months average salary, immediately preceding the month of retirement While claiming the statutory amount (i.e. Rs.1000000), any amount claimed earlier as deduction u/s 10(10) shall be reduced from Rs.1000000. The statutory limit of Rs.350000/- has been raised to Rs.10 lakh for an employee who retire or become incapacitated prior to such retirement or die on or after the 24^th day of May, 2010 or whose employment is terminated on or after the said date
C. Gratuity received by a widow or legal heir	The Act is silent on treatment of gratuity received after death of employee. However, on following grounds, it can be concluded that gratuity received by a legal heir shall not be taxable in the hands of the recipient - A lump sum payment made gratuitously to widow or legal heir of employee, who dies while in service, by way of compensation or otherwise is not taxable under the head Salaries. [Circular No.573, Dated 21.08.1990] Unutilised deposit under the capital gains deposit account scheme shall not be taxable in the hands of legal heir. [Circular No.743 dated 6/5/1996 ] Legal representative is not liable for payment of tax on income that has not accrued to the deceased till his death. Leave salary paid to the legal heir of deceased employee is not taxable as salary. [Circulars Letter No. F.35/1/65-IT(B), dated 5/11/1965 ]. Further, leave salary by a legal heir of the Government employee who died in harness is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981]. Taxpoint: If gratuity becomes due before the death of the assessee (no matter when and by whom received), it shall be taxable in the hands of employee. Whereas if gratuity becomes due after the death of assessee, it shall not be taxable (even in the hands of legal heir of the assessee).
Relief u/s 89: Assessee can claim Relief u/s 89(1)