TAX TREATMENT OF GRATUITY AND LEAVE ENCASHMENT

Avinash Raju
1416330
9 BBA LLB A

Gratuity is a monetary benefit given by the employer to his employee at the time of
retirement or deathIt is usually given as a reward for loyalty and service grantedIt was
voluntary before but now it is a legitimate claimIt depends on length of service -Minimum 5
years of service ( Does not apply in case of death or permanent disablement).

Every person working in a factory, mine, oil field, port, railways, plantation, shops &
establishments, or educational institution having 10 or more employees on any day in the
preceding 12 months is entitled to gratuity. Once the Act becomes applicable to an employer
– even if the number of employees goes below 10, gratuity is still applicable

S.10(10) (i)- Gratuity Received by Government Employees completely exempt from Tax

S.10(10) (ii)-For Employees under the Payment of Gratuity Act 1972. The least of the
following is exempted

 Amount of Gratuity Received

 15 Days salary for every completed year of service
 Rs.20 Lakhs ( Hiked from 10 Lakhs)

Eg The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to
receive a gratuity of Rs. 11 Lakhs. He has been in employment for the last 19 years and 7
months.

Particulars Previously As Amended

Last drawn salary 1 lakh 1 lakh

(Basic + DA)

Number of years of 20 (will be rounded 20 (will be rounded

employment off) off)
Gratuity 1,00,000*20*15/26 1,00,000*20*15/26
= 11,53,846 = 11,53,846

Maximum exemption 10 lakhs 20 lakhs (as

allowed amended)

Gratuity actually 11 lakh 11 lakh

received

Amount of exemption 10 lakh 11 lakh

(least of the above)

Taxable gratuity 1 lakh -

For seasonal employees however is Amount of Gratuity or 7 days salary for every year
completed or10 Lakhs – Statutory limit

LEAVE ENCASHMENT

Leaves can be encashed , During Service or at the time of retirement however Leave
encashed during service – considered as salary and not exempted from tax but Leave
encashed upon retirement(other than termination) for Government Employees – Fully
Exempt

O However for Non Government employees Leave exemption is least of the following

1. Rs 3,00,000

2. Leave encashment amount actually received

3. 10 Months Salary ( Basis of average salary of last 10 months)

4. Cash Equivalent to leave to the credit at the time of retirement

Eg.
Mr. Gupta retired on 1.12.2017 after 20 years of service, receiving leave salary of Rs
5,00,000.Basic Salary was 6600 per month.Leave availed during Service was 480 days and
he was entitled to 30 days leave every year

Now leave credit will be (20*30-480) multiplied by 6600/30 = 120 *220 = 26400

Therefore taxable leave salary will be the least of the 4 points

( 3 lakhs, 10 months salary[66,000 Rs],leave encashment actually received OR leave credit.

Therefore since its leave credit here

5,00,000-26400 = 4,73,600 is taxable leave salary