The purpose of this Note is to advise practices that will be followed with regard to deductions which will be allowed in respect of various contractual terminal payments to employees in determining the business chargeable income of the employer. To the extent that such payments are made to expatriate employees the guidelines which follow do no more than confirm what has been Departmental practice for very many years.
Over recent years, however, regard has been had to similar payments made to city employees, in particular, Approved Service Gratuities (Section 32* of the Income Tax Act) and Severance Benefits (Section 28 of the Employment Act). The various amendments to the Income Tax Act have
made provision for the income tax treatment of such payments in the hands of the employee but as far as employers are concerned the deductions allowable in respect of all terminal expenses, relating to
employees, must be considered within Part VI (Ascertainment of Chargeable Income) of the Income Tax Act. This Note attempts to cover acceptable bases for deductions of all such payments whether made to citizen or expatriate employees.
a) Employees covered under the Act
b) Employees not covered under the Act
An employee will be covered under the Act if the organisation employs at least 10 persons on a single day in the preceding 12 months. Once an organisation comes under the purview of the Gratuity Act, it will always remain covered even if the total number of employees falls below 10.
Calculation of gratuity
a) For employees covered under the Act
There is a formula using which the amount of gratuity payable is calculated. The formula is based on 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.
The formula is as follows:
(15 X last drawn salary X tenure of working) divided by 26
Here, last drawn salary means basic salary, dearness a .
a) For employees covered under the Act
There is a formula using which the amount of gratuity payable is calculated. The formula is based on 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months.
The formula is as follows:
(15 X last drawn salary X tenure of working) divided by 26
Here, last drawn salary means basic salary, dearness allowance and commission received on sales.