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CA Intermediate · Taxation · Salaries

Ramesh retired from a private company on 31 March 2027 after 28 years and 8 months of continuous service. He is covered by the Payment of Gratuity Act, 1972. His last drawn monthly salary (basic plus dearness allowance forming part of retirement benefits) was Rs 52,000, and he received gratuity of Rs 9,50,000. Assuming no earlier gratuity was ever received, how much of the gratuity is taxable under the head Salaries for tax year 2026-27?

Rs 80,000 is taxable. For a covered employee, 28 years 8 months is rounded up to 29 years. The exemption is the least of the amount received, Rs 20 lakh and 15/26 of last salary per year, which is Rs 8,70,000. Taxable gratuity is 9,50,000 minus 8,70,000.

  1. ARs 80,000Correct
  2. BRs 1,10,000
  3. CRs 1,96,000
  4. DRs 0

Explanation

For an employee covered by the Act, service is rounded up when the part year exceeds six months, so 28 years 8 months counts as 29 years. Exemption is the least of the amount received (9,50,000), the Rs 20 lakh limit and 15/26 x 52,000 x 29 = 8,70,000. Taxable = 9,50,000 - 8,70,000 = Rs 80,000. Ignoring the rounding up gives 8,40,000 exempt and Rs 1,10,000 taxable, which is wrong.

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