Name: Nishant Daripkar

Roll No.: 110

GRATUITY
Mr. Vikas Naik, a professor at MET College, receives Rs. 25,00,000 as gratuity. He is covered by
the Payment of Gratuity Act, 1972. And he finally decided to get retired on March 31, 2021
after rendering service of 38 years and 8 months. At the time of retirement his monthly Basic
Salary and Dearness Allowance was Rs. 50,000 and Rs. 15,000 respectively.
Is the entire amount of gratuity exempt from tax?
Will your answer be different if he was not covered by Payment of Gratuity Act, 1972?
Solution:
A) Covered by the Payment of Gratuity Act,1972
In the instant case, Mr. Vikas Naik is a non-government employee who is covered by the
Payment of Gratuity Act, 1972. Therefore, the amount of gratuity exempt u/s 10(10) in his
hands shall be least of the following:

(a) Gratuity actually received or receivable 25,00,000

(b) Maximum Amount u/s 10(10) 20,00,000
(c) 15/26 (x) ** Last Drawn Salary p.m. (x) No. of years of service 16,87,500

15/26 (x) Rs. 75,000 p.m. (x) 39 years

Therefore, gratuity exempt in the hands of Mr. Vikas Naik shall be Rs. 16,87,500. And the
amount of gratuity taxable in his hands shall be Rs. 8,12,000 [I.e. Rs. 25,00,000 (-) Rs.
16,87,500).

Note:
(1) ** Last Drawn Salary p.m. = Basic Salary (+) Dearness Allowance of the month immediately
preceding to the month of retirement i.e. Rs. 50,000 (+) Rs. 15,000 = Rs. 75,000.
(2) Fraction of the year is treated as the whole year in computing no. of years of service as the
fraction exceeds 6 months.
B) Not covered by the Payment of Gratuity Act,1972

However, if Mr. Vikas Naik was not covered by the Payment of Gratuity Act, 1972, then, in such
case,
the amount of gratuity exempt u/s 10(10) in his hands would have been least of the following:

(a) Gratuity actually received or receivable 25,00,000

(b) Maximum Amount u/s 10(10) 20,00,000
(c) 1/2 (x) ** Average Salary p.m. (x) No. of completed years of service 14,25,000

1/2 (x) Rs. 75,000 p.m. (x) 38 years

Therefore, gratuity exempt in the hands of Mr. Vikas Naik shall be Rs. 14,25,000. And the
amount of gratuity taxable in his hands shall be Rs. 10,75,000 [i.e. Rs. 25,00,000 (-) Rs.
14,25,000).

Note:
(1) ** Average Salary p.m. = (Basic Salary (+) Dearness Allowance) for 10 months immediately
preceding to the month of retirement / 10 months
i.e. [Rs. 50,000 (+) Rs. 15,000 ] (x) 10 / 10 i.e. Rs. 75,000.
(2) Fraction of the year is ignored as we must consider only the no. of completed years of
service.