Tax on gratuity

Gratuity is a part of salary, and anything in salary is taxable on due basis...

Secondly in your case gratuity is not taxable as the exemption limit is 10 lakhs.Anything received above this limit will be taxable

Many people I know had TDS deducted on Gratuity amount.My question is how to prevent company finance from decusting TDS on gratuity as 10lac exemption is available for Gratuity?.Should it be filed in IT returns for refund?

For the purpose of deduction of income tax payment of gratuity is divided into three

(1) Gratuity payale to Govt. employees ( as per Govt. Rules in this regard)

(2) Gratuity payable to employees under Payment of Gratuity Act 1972

Exemption is least of the following

(a) 15 days salary based on the salary last drawn for each year of service 

    ( 15 days salary x Length of service) Service more than 6 months taken as one year

     15 days salary is calculated as last drawn monthly salary divided by 26

(b) 10 Lakhs

(c) Actual amount received 

(3) Gratuity payable to employees who are not covered under Payment of Gratuity Act 1972

(a) Half months  average salary for each completed year of service.

  (Average monthly salary is calculated on the basis of average salary for the 10 months immediately   preceeding the month in which employee has retired. For calculation of length of service, any fraction of the year will be ignored. 

(b) Rs 10 lakhs

(c) Actual amount received.

For details refer Section 10(10) (ii) and (iii) of Income Tax Act 1961

Mr Nandy, pl cite your specific questions on this topic. Let is try to solve the issues. 

Sir,

A colleague resigned recently after 6 years of service.The gratuity received was clubbed with his income and taxed.According to the law referred to by you,the amount should not have been taxed as the amount was 1.6 lacks which is within the exemption(10 lac) allowed by the IT department.This is the general trend I have seen in most companies,gratuity is taxed by all of them.I am only referring to employees who have resigned.

My question is how to prevent the company finance from doing TDS on gratuity?

Or is it that once the amount is clubbed with income and taxed,we should apply for refund while filing IT returns.

TDS made is to be remitted within 7 days from the last day of the month in which deduction is made. So the amount might have been remitted and quarterly return filed by the employer. Now your friend can claim refund while filing IT return.

Or make a claim of the balance amount with the employer saying that the amount of gratuity received is less than the amount entitled. Also quote Section 10 (10) (i) (ii) (iii) of IT Act 1961. When the Government is giving an exemption, it is the duty of the employer to abide by the rules.