Page 163 - Group Insurance and Retirement Benefit IC 83 E- Book

Gratuity Schemes

Gratuity is one of the least understood components of salary. Investment Yogi explains
everything about Gratuity and the tax implications for you.

Gratuity is a part of salary that is received by an employee from his/her employer in
gratitude for the services offered by the employee in the company. Gratuity is a defined

benefit plan and is one of the many retirement benefits offered by the employer to the

employee upon leaving his job. An employee may leave his job for various reasons, such
as - retirement/superannuation, for a better job elsewhere, on being retrenched or by way

of voluntary retirement.

Eligibility
As per Sec 10 (10) of Income Tax Act, gratuity is paid when an employee completes 5 or

more years of full time service with the employer (minimum 240 days a year).

How does it work?

An employer may offer gratuity out of his own funds or may approach a life insurer in
order to purchase a group gratuity plan. In case the employer chooses a life insurer, he

has to pay annual contributions as decided by the insurer. The employee is also free to
make contributions to his gratuity fund. The gratuity will be paid by the insurer based

upon the terms of the group gratuity scheme.

Tax treatment of gratuity

The gratuity so received by the employee is taxable under the head ‗Income from salary‘.

In case gratuity is received by the nominee/legal heirs of the employee, the same is
taxable in their hands under the head ‗Income from other sources‘. This tax treatment

varies for different categories of individual assesses. We shall discuss the tax treatment of
gratuity for each assessed in detail.