The employers were always concerned about the gratuity amount being allowed as expenses under the Income Tax Act. Earlier actual amounts paid by way of gratuity when a workman retired or gratuity amounts kept aside based on actuarial calculations every year were admissible expenses. The flaw was though the employer showed, the figure of accumulated gratuity in his balance sheet, it was notional and not necessarily that the amount was available when the time came for actual distribution, especially as and when the company closed down. As on today there are three ways, in which gratuity is regarded as an admissible expense under Income Tax Act: i) Payment actually made on worker's retirement ii) Amounts transferred by way of premia to the insurance companies under Insurance Companies Schemes iii) Contributions transferred to the Gratuity Trust of the employer duly registered and approved by the Income Tax Department.

In the same manner gratuity amount upto Rs. Ten Lakhs in the hands of employees is exempted from Income Tax (w.e.f. 24th May, 2010).

The Government's grand plan under the Gratuity Act is however to compel the private employers to obtain an insurance from the life insurance companies unless the employer has already established an approved gratuity fund and desires to continue such arrangement. Having done this, the employer shall have to register his establishment with the Controlling Authority, the appropriate Government framing rules for the composition of the Board of Trustees and recovery by the Controlling Authority of the amount of gratuity payable to an employee either from the Insurance Company or the Board of Trustees. There is a further provision of calculation of interest on the delayed payments to the Controlling Authority and in violation, payment of fine, which may extend to Rs. 10,000/- and a further fine, which may extend to Rs. 1,000/- for each day during which the offence continues.

1. The Managing Trustee of that Gratuity Fund, which is established and approved by the Income Tax Commissioner, shall apply, for exemption from the provisions of sub-section (2) of Section 4-A of the Payment of Gratuity Act, 1972 (39 of 1972), to the Competent Authority appointed by the State Government, who will be not below the rank of Deputy Commissioner of Labour, along with the copy of their approved Scheme and all other documents prescribed under the Income Tax Act. (Rule 22)
2. A Competent Authority, after perusing all the relevant papers, if satisfied, may grant exemption.
3. The Managing Trustee shall be responsible to send an audited Balance Sheet to the Competent Authority appointed by the State Government every year.
4. In case of default on the part of the Managing Trustee to submit the audited Balance Sheet as per sub-rule (3), the Competent Authority will be free to revoke exemption order by giving show cause notice (by registered post), after a period of one month from the date of the issue of such show cause notice, if no satisfactory reply is filed.

To whom Application can be made by Employee, Nominee or Legal Heir:

1. The employee has to apply for gratuity (Form I) within 30 days from the date the gratuity becomes payable. But he can apply 30 days prior to superannuation or retirement where the date of superannuation or retirement is known.
2. A nominee has to apply within 30 days (Form J) and
3. the legal heir ordinarily within one year (Form K) from the date the gratuity becomes payable to him.

However, it is not necessary that application must compulsorily be made in these forms. They can be even made on a plain paper and also entertained by the employer if the applicant adduces sufficient cause for delay in preferring his claim and no claim for gratuity shall be invalid merely because the claimant failed to present his application within the specified period. Any dispute in this regard shall be referred to the Controlling Authority for his decision. An application for gratuity shall be presented by personal service or by registered A.D.