Income Tax on Gratuity: Know Everything About the Exemption Rules

Understanding the rules for gratuity tax exemption is crucial for employees who may receive it. Any person who works in an establishment with more than 10 workers for 5 continuous years is liable to receive this sum on termination of employment or as a post-retirement benefit. 

In case of an employee’s disability due to a disease or accident, or demise, the condition for 5 years of continuous employment is not applicable. 

To know the exemption limit of gratuity, taxation rules, exemptions available on such receipts and more, read on. 

When Can I Receive Gratuity?

Gratuity is a monetary benefit that employees receive from their employers over and above the regular salary. The Payment of Gratuity Act of 1972 governs the provisions relating to gratuity, which can be given in the following circumstances:

• Superannuation
• Retirement or resignation
• In case of death or disablement of the employee

Tax Liability on Gratuity 

As per the Income Tax Act of 1961, you need to pay tax on gratuity if they exceed a certain threshold. However, you can avail of tax exemption if the total gratuity receipts remain under this amount. The earlier limit of gratuity tax exemption was ₹10 lakhs, which has been increased to ₹20 lakhs.   

Gratuity Tax Rules

Here are some rules and regulations you need to be aware of regarding taxation of gratuity:

• In cases of death, retirement, resignation, and certain other situations, gratuity may be exempt from tax under Section 10(10) of the Income Tax Act of 1961.
• Gratuity received by an employee is considered income under the ‘Salaries’ head.
• In the case of the unfortunate demise of the employee, the gratuity is paid to the nominee or legal heir.
• This amount received by the nominee or legal heir is classified as income under ‘Income from Other Sources’.

Also Read: Guide on Income Tax Deductions in India

Income Tax Exemptions Available on Gratuity

The following categories of employees can claim gratuity tax exemption:

Exemptions for Government Employees

As per the Income Tax rules, employees working in government institutions can get a full exemption from paying taxes. This is applicable in the case of termination, retirement, superannuation, or disablement. You can claim this exemption if you work in any of the following government services:

• Central Government
• State Governments
• Defence Sector
• Civil Services
• Local Municipal Authorities

Also Read: Direct Tax Vs Indirect Tax

Exemption for Private Employees

If you are an employee involved in the private sector, you can claim exemption from tax on gratuity if you are covered under the Gratuity Act, 1972. You need to keep the following things in mind when computing tax liability and eligible gratuity tax exemption:

• In absolute terms, the aggregate gratuity received must not exceed ₹20 lakhs to claim exemptions
• It means that the exemption limit needs to be applied cumulatively to the gratuities received from all employers
• The additional gratuity received for more than 15 days of each completed year will be liable for taxation
• The salary for the purpose of computation of gratuity includes the basic salary and the dearness allowance (DA)

Note that you can also compute the income tax on gratuity using a gratuity calculator. This makes the calculations simpler and instant. 

By familiarising yourself with the income tax on gratuity and the available exemptions, you can significantly reduce your total tax liability. This will help you boost your savings and build a stronger financial future. 

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FAQs on Taxability of Gratuity

Is the gratuity taxable or non-taxable?

Yes, gratuity is taxable under the Income Tax Act of 1961. However, you can claim an income tax exemption on gratuity receipts up to ₹20 lakhs. 

How is the gratuity calculated as per income tax?

You can compute the gratuity using the following formula:

Gratuity=Last salary drawn by the employee x (15/26) x Number of years of service

How many times can the gratuity exemption be claimed?

As per the IT Act, there is no limit for availing of a gratuity exemption. You can claim the exemption until it reaches the gratuity exemption limit i.e. ₹20 lakhs.

Is gratuity taxable for government employees upon retirement?

Gratuity provided to employees working in the government sector upon termination, retirement, or superannuation is completely exempt from tax.

What is the gratuity exemption section in the Income Tax Act?

Section 10(10) of the IT Act mentioned that gratuity up to ₹20 lakhs is exempt from taxes.