Taxation of Gratuity
Who is entitled to receive gratuity
Computation of Gratuity
Those for whom separate pension rules are not prescribed, the pension is calculated as per the provisions of Payment of Gratuity Act, 1972. The gratuity is be computed at the rate of 15 days salary for each completed year of service. For the purpose of computing a year for calculation of gratuity, a period of more than six month has to be treated as full year and therefore the period of service of less than six months is ignored. While computing salary for the 15 days period, salary drawn by him at the time of retirement is be divided by twenty six and multiplied by fifteen. This is the minimum gratuity an employee is entitled so employer if so wishes can pay higher sum as gratuity.
Taxation of gratuity
Salary for the purpose of computing gratuity exemption shall include dearness allowance only if the terms of employment provide so. However no other allowances including House Rent Allowance, Leave Travel Allowance shall be taken into account though these in broader parlance are treated as salary. So even if your employer computes the amount of gratuity payable on the basis of salary which includes the other allowances, for exemption purposes under the income tax laws only the basic salary and the dearness allowance will only be considered.