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CA Intermediate · Taxation · Salaries

Rajesh, a manager in a private company not covered by any special gratuity law exemption beyond the Payment of Gratuity Act, 1972, retired after 21 years and 8 months of service. His last drawn salary (basic plus dearness allowance) was ₹52,000 per month. He received gratuity of ₹7,50,000 on retirement. What is the amount of gratuity taxable as salary in his hands for tax year 2026-27?

Taxable gratuity is ₹90,000. Exemption is the least of actual gratuity, ₹20 lakh, and 15/26 of last drawn salary for each completed year, with more than six months counted as a year. Service rounds to 22 years, giving ₹6,60,000 exempt, so ₹7,50,000 less ₹6,60,000 is taxable.

  1. A₹90,000Correct
  2. B₹1,20,000
  3. C₹7,50,000
  4. DNil

Explanation

For an employee covered by the Payment of Gratuity Act, exemption is the least of the actual gratuity, ₹20 lakh, and 15/26 × last drawn salary × completed years of service (a part year over six months counts as a full year). Service of 21 years 8 months counts as 22 years: 15/26 × 52,000 × 22 = 30,000 × 22 = ₹6,60,000. Taxable amount = 7,50,000 − 6,60,000 = ₹90,000. Using only 21 years gives exempt ₹6,30,000 and taxable ₹1,20,000, which is wrong.

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