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Unit 7: Income under the Head Salaries

establishment to which the Act has become applicable shall continue to be governed by the Act Notes
even if the numbers of persons employed falls below 10 at any subsequent stage. Here employees
are defined as those hired on the company’s payroll. Trainees and interns are not eligible for this
compensation.
Eligibility Criteria: Gratuity shall be payable to an “employee” on the termination of his
employment after he has rendered continuous service for not less than five years.
1. On his superannuation.
2. On his retirement or resignation.

3. On his death or disablement due to accident or disease.

Fully Exempted Gratuity

The amount of any death-cum-retirement gratuity received under:
a. the revised pension rules of the Central Government; or
b. the Central Civil Services (Pension) Rules, 1972; or
c. any similar scheme applicable to (a), the members of civil services of the Union, or
(b) holders of posts connected with defence or of civil posts under the Union, or (c) the
member of All India Services, or (d) the members of civil services of a State, or (e) holders
of civil posts under a State, or (f) employees of a local authority, or (g) Pension Code or
Regulations applicable to the members of the defence services 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.

Example: Mr. A, an employee of the Central Government, receives ` 1,00,000 as gratuity
at the time of his retirement on May 1, 2012 under the new pension code. Determine the taxability
of the gratuity in his hands for the assessment year 2013-14. In case he joins a private sector
company on July 1, 2012 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.
Conditions based Exemption

1. Where the employees are covered under the Payment of Gratuity Act, 1972: 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:

(a) 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

(b) the gratuity actually received; or (c) ` 10,00,000 (limit raised by notification no.43/
2010 dt.11-06-2010)

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