Section 10(10)(iii) in The Income- Tax Act, 1995

Central Government Act

(iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependents on his death, to the extent it does not, in either case, exceed one- half month' s salary for each year of completed service, 5[ calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government]: Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income- tax under this clause 6[ shall not exceed the limit so specified]:

1. Inserted by the Finance (No. 2) Act, 1991, w. e. f 1- 4- 1991

2. Substituted by the Finance Act, 1974, w. e. f. 1- 4- 1975. Earlier, it was amended by the Finance Act, 1972, w. e. f. 1- 4- 1973 and the Finance Act, 1974 itself w. r. e. f. 1- 6- 1972 1- 4- 1962.

5. Substituted for' calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is paid, subject to a maximum of thirty- six thousand rupees or twenty months' salary so calculated, whichever is less' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for' thirty thousand' by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

6. Substituted for' shall not exceed thirty- six thousand rupees" by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for" thirty thousand' by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

Provided further that where any such gratuity or gratuities was or were received in any one or more earlier previous years also and the whole or any part of the amount of such gratuity or gratuities was not included in the total income of the assessee of such previous year or years, the amount exempt from income- tax under this clause 1[ shall not exceed the limit so specified] as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years: 2[ ] Explanation.- 3[ In this clause and in clause (IOAA)]," salary" shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule;]

1. Substituted for' shall not exceed thirty- six thousand rupees' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. The italicised words were substituted for' thirty thousand" by the Finance Act, 1983, w. r. e. f. 1- 4- 1982.

2. Omitted by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989. Prior to the omission, the third and fourth provisos, as amended by the Finance Act, 1983, w. r. e. f. read as under:" Provided also that the Central Government may, having regard to the maximum amount which may for the time being be exempt under sub- clause (i) increase, by notification in the Official Gazette, the limit of thirty- six thousand rupees, for all the three purposes for which it has been mentioned in the foregoing provisions of this clause, up to such maximum amount: Provided also that in relation to cases in which the event (that is to say retirement of the employee or his becoming incapacitated or termination of his employment or his death, as the case may be) on which gratuity is received had taken place before the 31st day of January, 1982, the proviso immediately preceding this proviso shall not apply and the remaining provisions of this clause shall have effect as if for the words" thirty six thousand rupees", at the three places where they occur, the words" thirty thousand rupees" had been substituted."

3. Substituted for" In this clause' by the Direct Tax Laws (Amendment) Act, 1987, w. e. f. 1- 4- 1989.

3 All the three limits specified in the section will operate as cumulative conditions and the exempt portion of the gratuity will be restricted to any of these three limits whichever is the least. Retirement gratuity will be exempt to the extent mentioned in the latter half of the section and the remaining amount will be entitled to relief under section 89 1. In the case of gratuity funds approved for the purposes of Income- tax Act a provision authorising the payment of gratuity to an employee while he continues to remain in service should not be allowed. The latter half of the section should be regarded as covering the case of only a gratuity payment on the employee' s retirement or on his becoming incapacitated or on termination of his employment or on his death. The rules of a fund approved for the purposes of Income tax Act should not permit the payment of gratuity in the form of annuities payable over a specified number of years. In order to claim the exemption under the section it is necessary that the amount of gratuity should be calculated exactly on the basis laid down in the section.[ Letter No. 1 (1 79) 162, dated 13th December, 1962 ] 4 The expression' termination of employment used in the section as amended by Finance Act, 1972 covers the case of an employee whose services come to an end due to his resignation. 5 Limit of exemption of death- cum- retirement gratuity under section 10 (10) (iii) has been raised to Rs. 1 lakh in relation to employees who retire of become incapacitated or die on or after 1st April, 1988 or whose employment is terminated on or after that date.