Example:-An employee of X Ltd. retires on 10th March, 2015 after service of 26 years and receives ₹ 6,50,000 as gratuity. X Ltd. is not covered by the Payment of Gratuity Act, 1972). If Salary drawn by him during 1st May 2014 and 28th February 2015 is as follows: 1st May 2014 to 31th December 2014 Rs. 26,000 p.m. 1st January 2015 to 28th February 2015 Rs. 26,500 p.m. Besides, he receives ₹ 400 p.m. as dearness allowance (forming part of salary for the computation of retirement benefits). He is also entitled to 6% commission on sales achieved by him (during 1st May 2014 and 28th February 2015, turnover achieved by the employee is ₹ 25,77,860). Is the entire amount of gratuity exempt from tax?

Chapter No. 03 - Salary - Gratuity - [Sec. 10(10)]

Average monthly salary in this case would be computed as under:

Total basic salary drawn during 10 months immediately preceding the month in which the employee is retired (i.e. from 1^st May 2014 to 28^th February 2015) : (8 x 26,000 + 2 x 26,500) = ₹ 2,61,000

Average basic salary (i.e. 2,61,000/10) (a)                                                    ₹ 26,100

Dearness Allowance of one month (b)                                                           ₹ 400

Commission of 10 months (i.e. 6% of 25,77,860)                                           ₹ 1,54,672

Monthly commission (i.e. 1,54,672/10) (c)                                                    ₹ 15,467

Average Monthly Salary (a + b + c)                                                                ₹ 41,967

Out of

1. ₹ 5,45,571 (i.e. 0.5 x 41,967 x 26)
2. ₹ 10,00,000
3. 6,50,000

₹ 5,45,571 being the least of the three sums, is exempt u/s 10(10)(iii).

The balance of ₹ 1,04,429 is taxable for the assessment year 2015-16.

Dated: 10-8-2015