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.

Gratuity exemption: least of three test determines exempt portion for noncovered employers; excess gratuity is taxable. Gratuity from a noncovered employer is exempt to the extent of the least of three amounts: the service based fraction computed from the average monthly salary (which includes basic pay, one month's dearness allowance, and average monthly commission), the statutory monetary ceiling, and the gratuity actually received; any excess over that exempt amount is taxable.