Gratuity is the payment made to an employee upon retirement as a recognition of their dedicated service to the company. Typically, it is disbursed after the completion of a 5-year tenure. Previously, gratuity was offered as a gesture of appreciation, not mandatory. 

 

The Payment of Gratuity Act, 1972, has enforced its compulsory payment by companies upon an employee's retirement. 

Revision of the Gratuity Limit after the 2018 Amendment

The Central Board of Direct Taxation has notified an increase in the gratuity exemption limit to ₹20 Lakhs, effective from March 29, 2018. Due to the rise in margin of the gratuity exemption limit, the gratuity amount on which tax is levied is reduced. 

 

This benefits employees who earn a higher salary and are close to retirement. Furthermore, even employees with an extended time until retirement will benefit from the amendment.

Income Tax on Gratuity Payment

Gratuity, considered part of salary, is taxable under the Income Tax Act, 1961, and exemptions are provided based on specific conditions. If the intended gratuity recipient is deceased, the amount is disbursed to the employee's nominee. 

 

Here, the nominee is responsible for tax obligations on the received gratuity, which is categorized as income from other sources during income tax filing.

Income Tax Exemptions on Gratuity

The tax exemptions on gratuity differ on the basis of the employment type. The income tax exemptions can thus be categorised as follows:

  • Government Sector Employees 

Gratuity received by government employees upon retirement, termination, or superannuation is fully tax-exempt. This includes individuals in state and Central Government, defense, and local authorities.

  • Private Sector Employees 

Both the retirement and death gratuity are tax-exempt up to ₹20 Lakhs, the total actual gratuity received, or total salary. The latter is calculated as 15 days of service for each completed year or part thereof beyond six months (15/26).

Income Tax Exemptions for Employees Not Covered Under the Payment of Gratuity Act

Employees not covered by the Payment of Gratuity Act are also eligible for gratuity payment, qualifying for tax exemptions under specific conditions. Whichever of the following possibilities is the least would qualify for a tax exemption:

  • Actual gratuity amount received

  • Gratuity of ₹20 Lakhs

  • Last 10 month’s average salary, multiplied by employment tenure and half a month’s salary 

 

The gratuity is taxable if the total amount received by the employee surpasses the maximum limit.

FAQs

Is gratuity taxable in India?

Government employees enjoy a gratuity that is fully exempted from tax. Private sector employees can qualify for tax exemptions depending on their coverage under the Payment of Gratuity Act. Employees falling under the act can avail gratuity exemption up to ₹20 Lakhs, while those not covered have a tax exemption limit of ₹10 Lakhs.

How is tax on gratuity in India calculated?

For private sector employees that are covered under the Payment of Gratuity Act, the least one among the following possibilities is eligible for tax exemption:

  • Actual gratuity amount received

  • Gratuity of ₹20 Lakhs

  • Last salary (basic salary + dearness allowance) x employment duration x 15/26

Can an employee get excess gratuity?

Yes, an employee can get excess gratuity if their employer decides to do so. However, the excess gratuity amount provided to the employee will fall under the taxable income. 

How does the new amendment in the Payment of Gratuity Act benefit employees?

The latest amendment has increased the maximum limit for gratuity eligible for tax exemption up to ₹20 Lakhs from the previous limit of ₹10 Lakhs.

Is the gratuity amount a part of the CTC?

Yes. Gratuity is commonly included as a component of the Cost to Company (CTC) package in India.

Who can enjoy the benefit of gratuity?

Employees who have served a company for five or more years can avail of gratuity benefits. Additionally, gratuity will be paid to employees in the events of retirement, disability, or death. In case of death, the amount will be received by the nominee.

What is the maximum amount payable as gratuity?

As per the amendment, for those that are covered under the Payment of Gratuity Act, the maximum cap for gratuity to be tax exempt is ₹20 Lakhs.

Is there an alternative way other than manual calculations to determine gratuity amount?

You can use an online gratuity calculator which will give you the taxable gratuity amount in addition to the total gratuity amount.

What kind of deduction is applicable to gratuity?

If an employer is terminated for damaging an employer’s property or willful negligence, the cost of the damage may be deducted from the gratuity amount.

Is the gratuity limit increased to 30 lakhs?

No. The recent amendment sets the maximum tax-exempt cap for gratuity at ₹20 Lakhs under the Payment of Gratuity Act.

Is PF and gratuity taxable?

Any interest income earned or accrued on PF contributions of more than ₹2.5 Lakhs in a financial year, is taxable. 

 

In terms of gratuity, the amount is fully tax exempt for government employees and only partially exempted for non-government employees. The tax-exempted amount is capped by the government, and any excess may be subject to taxation.

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