Section 10(10) of the Income Tax deals with Exemption for Death and Retirement Gratuity. The Income Tax Act fully exempts, under section 10(10), such gratuity paid to the employee. This Section is very famous among the Central Government employees. Section 10(10) is one of the oldest provision in the Income Tax Act. The exemption under section 10(10) is applicable to employees who are covered under Payment of Gratuity Act, and also to employees not covered under the Act.
Section 10(10) Exemption Limit
The amount of any death-cum-retirement gratuity received under:
- the revised pension rules of the Central Government; or
- the Central Civil Services (Pension) Rules, 1972
is wholly exempt from tax under Section 10(10)(i) of the Act.
The payment of gratuity by the Life Insurance Corporation of India under the Staff Regulations is wholly exempt from tax under Section 10(10), as the object and purpose of the gratuity scheme of the Life Insurance Corporation of India and the Revised Pension Rules of the Central Government are the same.
Section 10(10) Illustration Example under Section 10(10) Income Tax Act
Mr. Y, an employee of the Central Government, receives Rs.2,00,000 as gratuity at the time of his retirement on May 1, 2016 under the new pension code. Determine the taxability of the gratuity in his hands for the assessment year 2017-18. In case he joins a private sector company on July 1, 2016 as its Managing Director, will it make any difference?
Solution: Gratuity received by Mr. A shall be fully exempt from tax under Section 10(10)(i) of the Income-tax Act, 1961 as he is an employee of Central Government. Even if he joins a private sector company after the retirement, the aforesaid exemption shall still be available to him.
Condition for Exemption when Employee covered under Section 10(10) Gratuity Act
The amount of any gratuity received under The Payment of Gratuity Act, 1972, it shall be exempt from tax to the extent of least of the following:
- fifteen days’ wages (seven days’ wages in case of seasonal establishments) for each completed year of service or part thereof in excess of six months on the basis of salary last drawn for every completed year of service or part thereof in excess of six months; or
- the gratuity actually received; or
- Rs.10,00,000 (limit raised by notification no.43/2010 dt.11-06-2010
“Wages” means all emoluments which are earned by an employee while on duty or on leave in accordance with the terms and conditions of his employment and which are paid or are payable to him in cash and include dearness allowance but do not include any bonus, commission, house rent allowance, overtime wages and any other allowance.
The Supreme Court has held that wages of fifteen days or seven days, as the case may be, will be calculated by dividing the wages last drawn by 26, i.e. maximum number of working days in a month [Digvijay Woollen Mills Ltd. v. Mahendra Prataparai Buch (1980) 4 Taxman 15].
Condition for Exemption when Employee NOT covered under Section 10(10) Gratuity Act
The amount of any other gratuity received by the employee from a private employer (not covered under the Payment of Gravity Act, 1972) on his retirement or at the termination of his employment or on his becoming incapacitated or received by the employee’s nominee on the former’s death, to the extent it does not, in either case
- exceed 1/2 month’s salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, or
- gratuity actually received Where gratuities are received by the employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under (c) shall not exceed `10,00,000
Where any gratuity/gratuities was/were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity was not included in the total income of the assessee, the limit of ` 10,00,000* will be reduced by the amount of gratuity which has been exempted earlier
The Supreme Court has held that if under the terms of employment, commission is payable at a fixed percentage of turnover achieved by the employee such commission would partake of the character of ‘Salary’. Therefore, salary will be basic salary, dearness allowance (forming part of salary for retirement benefits) and percentage commission.