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Home (/) / Income Tax (/income-tax-efiling) / Salary Income (/s/salary-income)

/ Income Tax Exemption on Gratuity

Income Tax Exemption on Gratuity

Under Income Tax Act

Updated on Nov 27, 2019 - 05:37:40 PM

Gratuity is a benefit given by the employer to employees. A recently approved amendment by the
Centre has increased the maximum limit of gratuity. Now it is tax exempt up to Rs 20 lakh from the
previous ceiling of Rs 10 lakh, which comes Section 10(10) of the Income Tax Act. The CBDT
Notification no. S.O. 1213(E), dated 8 March 2019, clarified that the exemption limit of Rs 20 lakh would
be applicable to employees in the event of retirement or death or resignation or disablement on or after
29 March 2018.

Let us understand the impact of this amendment in comparison with the previous provisions.

1. Understanding the Basics of Gratuity

2. Employees Covered Under the Payment of Gratuity Act
3. Employees Not Covered Under the Payment of Gratuity Act
4. Government Employees
5. Impact of the Amendment
1. Understanding the Basics of Gratuity
Gratuity is a monetary benefit given by the employer, but not paid as part of the regular monthly salary. The
provisions of gratuity are governed by the Payment of Gratuity Act, 1972, and it is given on the occurrence of any of
the following events.

a. On superannuation (means an employee who attains the age of retirement is said to be in superannuation)

b. On retirement or resignation

c. 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)

It is mandatory for the employee to have completed a minimum of five years in service to be able to receive gratuity.
It is not available for interns or temporary employees.

2. Employees Covered Under the Payment of

Gratuity Act
Every individual – 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, even if the number of employees goes below 10, gratuity is still
applicable.

Calculation of amount of gratuity exempted from tax

The least of the following is exempt from tax:

Last salary (basic + DA)* number of years of employment* 15/26;

Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment);
Gratuity Actually received

Let us understand this through an illustration:

The last salary drawn by Rohan is Rs.1 Lakh per month (basic + DA). He is entitled to receive a gratuity of Rs. 11
Lakhs. He has been in employment for the last 19 years and 7 months.

Sr. Particulars Previously As Amended

No.

1 Last drawn salary (Basic + DA) 1 lakh 1 lakh

 Number of years of employment 20 (will be rounded off) 20 (will be rounded off)

Gratuity 1,00,000*20*15/26 = 1,00,000*20*15/26 =

11,53,846 11,53,846

2 Maximum exemption allowed 10 lakhs 20 lakhs (as amended)

3 Gratuity actually received 11 lakh 11 lakh

Amount of exemption (least of the 10 lakh 11 lakh

above)

Taxable gratuity 1 lakh –

Points to note:

15 days salary based on the salary last drawn for every completed year of service or part thereof i.e. 15/26.
Number of years in service is rounded off to the nearest full year.

3. Employees Not Covered Under the Payment of

Gratuity Act
There is no law that restricts an employer from paying gratuity to his employees, even if the organization is not
covered under the Payment of Gratuity Act. The amount of gratuity payable to the employee can be calculated based
on half month’s salary for each completed year.

Calculation of amount of gratuity exempted from tax

The least of the following are exempt from tax:

Last 10 month’s average salary (basic + DA)* number of years of employment* 1/2;
Rs. 10 lakhs (the hike to Rs 20 lakhs is not applicable for employees not covered under the
Payment of Gratuity Act)
Gratuity actually received

Gratuity exemption for such employees would be computed as follows:

Raghav has been in employment for 25 years and 2 months. The average salary for the last 10 months is Rs.
90,000. The actual gratuity received by him is Rs. 11 Lakhs.

Sr. No. Particulars Amount (Rs.)

1 Average of last 10 month’s salary 90,000

Number of years of employment 25 (will be rounded off)

Gratuity 90,000*25*1/2 = 11,25,000

2 Maximum exemption allowed 10 lakhs

3 Gratuity actually received 11 Lakhs

 Amount of exemption (least of the three) 10 Lakhs

Taxable Gratuity 1 Lakh

Points to note:

An average salary of previous 10 months is considered

Number of years in service is rounded off to the nearest full year

4. Government Employees
Gratuity paid by the government to government employees is fully exempt from tax.

5. Impact of the Amendment

The impact of the amendment is evident from the example. A hike in the ceiling limit of maximum exemption helps
reduce the taxable gratuity amount. This amendment is going to benefit those earning higher salaries in the short
run. However, if you have a long time left before your retirement, this amendment will benefit most employees.

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