Explain the provisions relating to Gratuity u/s 10 (10) and Commuted pension u/s (10)10A.

 Gratuity is a gratuitous payment made by the employer to his employee. It is a gift or present, in return for favor of services rendered, at the time of retirement or death. It is paid in recognition of long and meritorious services, rendered by the employee.

The payment of gratuity act, 1972 has legally recognized the concept. Even where the act is not applicable, invariably all employers provide for payment of gratuity to their employees through the terms of employment. 

The amount of gratuity is paid to the employee, if he survives at the time of retirement, or to his wife or children, if he dies before retirement. The provisions regarding gratuity are stated below:

a) In the case of government employees [Sec10(10)(i)] Any death – cum – retirement gratuity received by central, state, local government employees is fully exempt from income tax.

b) In the case of employees covered by the Payment of Gratuity Act, 1972 [Sec 10(10)(ii)] Any gratuity received by an employee covered by the Payment of Gratuity Act, 1972 is exempt from tax to the extent as stated below:

i) 15 days salary (7 days in case of employees of a seasonal concern) for each years’ service (service for a period of more than 6 months is regarded as one year’s service) based on salary last drawn i.e., 15 days salary x length of service, or.

ii) 20,00,000 as maximum amount; or

iii) Actual amount of gratuity received, whichever is less Taxable gratuity = Actual gratuity received – Exempted gratuity (Meaning of salary for purpose of computation of gratuity = Last drawn salary + D.A. last drawn by the employee but excluding all other payments)

Note:

1) Any bonus, commission, H.R.A., overtime wages or any other allowances is not included.

2) Salary of 15 days is calculated as below. 15 day’s salary= 𝑠𝑎𝑙𝑎𝑟𝑦𝑦 𝑑𝑟𝑎𝑤𝑛 𝑖𝑛 𝑙𝑎𝑠𝑡 𝑚𝑜𝑛𝑡ℎ 26 ×15 

3) Salary of 15 days in case of piece rated employee is calculated as below: 15 days salary = 𝑀𝑜𝑛𝑡ℎ𝑙𝑦 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑤𝑎𝑔𝑒𝑠 (𝐼𝑛𝑐𝑙𝑢𝑑𝑖𝑛𝑔 𝑜𝑣𝑒𝑟𝑡𝑖𝑚𝑒 𝑤𝑎𝑔𝑒𝑠) 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑑𝑢𝑟𝑖𝑛𝑔 𝑙𝑎𝑠𝑡 3 𝑚𝑜𝑛𝑡ℎ𝑠 26 ×15

4) For the purpose of this act, one month is regarded as 26 days.

5) 6 months or more than 6 months shall be considered as one year

iii) In the case of any other employees [Sec 10(10)

(iii): The employees who are not covered under the Payment of Gratuity Act, 1972, received gratuity by him or by his widow or by his children on his retirement, death, termination of service, resignation or on his becoming incapacitated prior to his retirement, is exempt from tax to the extent as stated below:

a) ½ month’s average salary for each year of completed service; or

b) maximum amount i.e. Rs.20,00,000; or

c) Actual gratuity received.

Note:

1) Meaning of salary for computation of gratuity: Basic salary + Dearness Allowance. + Dearness Pay (if under the terms of employment) + commission (if it is payable at a fixed percentage of turnover.)

2) Average monthly salary is to be calculated on the basis of 10 months’ salary immediately preceding the month in which the employee retires.

3) For calculating completed years of service any fractional portion (even if it amounts to 11 months and 29 days) is to be ignored.

4) Any gratuity received in excess of the exempted limit is taxable as salary. However, any gratuity received in excess of the exempted limit is taxable as salary.

5) Where gratuity is received by an employee from more than one employer, either in the same year or in different years. The total amount of gratuity exempt cannot exceed Rs.20,00,000.

Since gratuity is taxed as salary, existence of relationship of employer and employee is vital. For example, the gratuity paid by LIC to its agents does not qualify for any exemption.

Commutation of pension Section 10 (10A): Where an employee gets a lump sum as a consideration for commutation of his pension, the sum received constitutes salary in his hands and is taxable according to the following gprovisions:

a) Commuted pension received by Government employees Any commuted pension received by a Government employee shall be fully exempt, also the entire commuted value of pension received by a government servant, who voluntary resigns and join the services of a public sector corporation is exempt.

b) Commuted pension received by Non-government employees Commuted pension in this case is exempt from tax, to the extent stated below:

i) Where the employee is in receipt of gratuity, the commuted value of 1/3rd of the total pension shall be exempt. 

ii) In any other case, the commuted value of ½ of total pension shall be exempt.

Any excess over such exempted amount is taxable as salary, where on account of taxation of commuted pension, the pensioner pays tax on a higher slab rate; he is entitled to relief under section 89(1). Arrears of pension are taxable on due basis, whether received or not.

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