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Income Tax Laws – I

Notes

Notes “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.

Example: Mr. B is employed in a non-seasonal factory at a salary of ` 2,400 P.M. Besides,
he also gets dearness allowance @ 600 P.M. and bonus @ ` 200 P.M. He retires on December 31,
2012 and gets 75,000 as gratuity under the Payment of Gratuity Act after serving 31 years and 4
months in that factory. Compute the amount of gratuity which is exempt under the Income-tax
Act, 1961.
Solution:

In this case 31 years shall be taken as completed years of service. 15 days’ salary is ` 1,730.77
(i.e. ` 3,000 × 15 ÷ 26) Out of ` 75,000 received as gratuity, the least of the following will be
exempt from tax:

(i) 53,654 (being 15 days salary for each completed year of service i.e. ` 1,730.77 × 31);
(ii) 10,00,000; or
(iii) 75,000 (being gratuity actually received).

Hence, ` 53,654 being the least is exempt from tax and the balance ` 21,346 is taxable for the
assessment year 2013–14.
2. Where the employees are not covered under the Payment of Gratuity Act, 1972: The amount
of any other gratuity received by the employee from a private employer 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,
(a) exceed one–half 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
(b) ten lakhs rupees or

(c) 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.

Notes 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.
‘Salary’ includes dearness allowance, if the terms of employment so provide, but excludes all
other allowances and perquisites. Where an employee receives dearness pay, it shall be included
in the salary.

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