• +91 9261 2110 03
  • ptaimp@gmail.com
  • Mon - Sat: 8:00 - 20:00

How gratuity received by you will be taxed? Lets’see.

Gratuity is the form of gratitude provided to employees in monetary terms for being in service with the company. It acts like a retirement benefit and is taxed under the head Income from Salaries. It is payable to an employee when he or she leaves employment after completing at least five years in service with the company, on the happening of the following events:

  • On superannuation (means an employee who attains the age of retirement)
  • On retirement or resignation
  • On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

However, The employer has the right to reject payment of gratuity to an employee if he/she has been asked to leave his/her job owing to any misconduct.

Taxation of Gratuity:

The taxation process for gratuity depends upon the employee who is receiving the gratuity amount. Such employees are divided into following three categories:

  • Government Employees: Any gratuity received by an employee of the Central Government, State Government or local authority, on death or retirement is fully exempt from tax.
  • Private Employees, where Employer is covered by the Payment of Gratuity Act,1972: As per the Payment of Gratuity Act,1972, every permanent employee working in a factory, mine, oil field, port, railways, plantation, Shops & Establishments, or educational institution having 10 or more employees on any day in the preceding 12 months is entitled to Gratuity. Once the Act becomes applicable to an employer, gratuity remains applicable even if the number of employees goes below 10.

Gratuity received by such employees is exempt from tax, up to least of the following:

  • Last drawn salary * number of years in service *15/26.
  • Actual Gratuity received.
  • ₹20 lakhs. (As per latest amendment)

Note: Here, Salary = Basic Pay + Dearness Allowance

Number of years in service is rounded off to the nearest full year. For example – if you have worked in an organization for 12 years and 2 months, the number of years in employment shall be considered to be 12 years. And in case you have worked for 12 years and 7 months, the number of years in employment shall be considered to be 13 years.

Let us understand the above case with the help of an example:

X worked for a company for 19 years and 10 months. His company is covered by the Payment of Gratuity Act. At the time of his retirement, his last drawn basic salary and DA was ₹30,000. He received ₹10,00,000 as Gratuity from his employer.

Gratuity received by X is exempt from tax, up to least of the following:

  • 30000 x 20 x 15/26 = ₹3,46,154
  • ₹10,00,000 (actually received)
  • ₹20,00,000 (maximum limit)

Therefore, the amount of Gratuity that is exempt from tax for X is ₹3,46,154 and remaining amount of ₹6,53,846 is taxable.

  • Private Employees, where Employer is not covered by the Payment of Gratuity Act,1972: Gratuity received by Private Employees, where Employer is not covered by the Payment of Gratuity Act,1972, is exempt up to least of the following:
    • Half month’s salary for each completed year of service i.e. Average salary * 1/2*Number of years of service.
    • Actual Gratuity received.
    • ₹20 lakhs. (As per latest amendment)

Note: While calculating completed years, any fraction of a year shall be ignored. For example – if you have worked in an organization for 14 years and 9 months, the number of years in employment shall be considered to be 14 years. Here salary is taken as the average salary of the 10 months immediately before the month in which the person retires.

Let us understand the above case with the help of an example:

A who works for PQR Ltd. Retires after 30 years and 9 months of service. He receives ₹12,00,000 as a gratuity. His average monthly salary of 10 months immediately preceding month of retirement is ₹100,000.

For A, the minimum of these amounts shall be exempt from Tax

  • 100,000 x ½ x 30 = 15,00,000
  • ₹12,00,000 (actually received)
  • ₹20,00,000 (maximum limit)

Therefore, for A, the entire amount received as gratuity will be exempt from tax.

Varun Baid

Varun Baid

Leave a Replay

About Me

I’m a Commerce Graduate & CFP Professional, engaged in blogging since 3 years. I’m not affiliated with any financial product. The purpose of writing blog is to spread financial awareness and help people in achieving excellence for money. Please note that the views expressed on this Blog/Comments are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment advice or legal opinion.

Recent Posts

Follow Us

Weekly Tutorial

Enquire With Us

For More Query Contact Us

Professional Programs

  • Certified Financial Planner
  • Chartered Market Technician

Blended Programs

  • Certified Market Professional
  • Certified Banking Professional
  • Certified Credit Professional
  • Certified Technical Professional

Certifications programs

  • Registered Investment Adviser
  • NISM Certification
  • Microsoft Office Specialist
  • Cambridge Business English

Digital Marketing

  • Certified Digital Marketing Professional
  • Professional Diploma In Digital Marketing

Visit Us

  • Professional Training Academy
  • ptaimp@gmail.com
  • +919261211003
  • +911414020051

© 2018 All rights reserved