Income Tax Exemption on Gratuity: Definition and Amendment

Gratuity is the payment an employer makes to you upon retirement or as a recognition of dedicated service to the company. In India, the Payment of Gratuity Act, 1972, governs gratuity payments. You are eligible for gratuity after completing 5 years of service with a company.

Considered a part of your salary, gratuity is taxable under the Income Tax Act, 1961. However, there are specific conditions under which exemption is granted. An amendment by the Centre raised the tax exemption limit on gratuity to ₹20 Lakhs from ₹10 Lakhs.

Who is Eligible to Get Gratuity

Gratuity may be paid if the the employee meets the below conditions:

They must be a full-time salaried employee of a company
They must have completed a minimum of five years of continuous service
They may receive gratuity upon superannuation or resignation
They may receive gratuity in cases of disablement due to an accident or disease, or in the event of death

For the last pointers, the criteria of working for five years is not applicable.

Income Tax Exemptions on Gratuity

The tax exemptions on gratuity differ based on the employment type. It can be categorised as follows:

Government Sector Employees

Gratuity that government employees receive upon retirement, termination, or superannuation is fully tax-exempt. This includes individuals in the state and central government. It also covers members of civil services and defence, and other local authorities.

Private Sector Employees

This depends on whether the employees are eligible under the Payment of Gratuity Act. f eligible, they can enjoy an exemption for the least amount among the following:

Actual gratuity amount received
Gratuity of ₹20 Lakhs
Last salary (basic + DA)* number of years of employment* 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. The lowest amount from the following qualifies for tax exemption:

Actual gratuity amount received
Gratuity of ₹20 Lakhs
Last 10 month’s average salary, multiplied by years of employment and half a month’s salary

The gratuity is taxable if the total amount you receive as an employee surpasses the limit.

Is gratuity taxable or not in India?

Government employees get a gratuity that is exempted from tax. Private sector employees may qualify for tax exemptions. But this depends on whether they are covered under the Payment of Gratuity Act. If you are covered, you can get tax exemption on gratuity of up to ₹20 Lakhs.

How is tax on gratuity in India calculated?

The taxable gratuity amount is added under the head ‘Income from Salary’. It is taxed as per the tax slab you fall under. The least of the below amounts is exempt from taxation:

Actual gratuity received
Last 10 month's average salary*years of employment* half a month’s salary i
₹20 Lakhs

Can an employee get excess gratuity?

Yes, if their employer decides to do so. But the excess gratuity amount will fall under the taxable income.

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

The amendment raised the upper cap for gratuity eligible for tax exemption ₹20 Lakhs. It earlier stood at ₹10 Lakhs. This means you now enjoy a higher tax benefit.

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 get gratuity. Additionally, employees receive gratuity in the event of retirement, disability, or death. In case of death, the nominee receives the amount.

Is there another way other than manual calculations to determine the gratuity amount?

You can use an online gratuity calculator. It will show you the taxable gratuity amount and the total gratuity amount.

What kind of deduction is applicable to gratuity?

The gratuity may be deducted if the employment is terminated. This could be for damaging the employer's property or wilful negligence. The cost of the damage may be deducted from the gratuity amount.

Is the gratuity limit increased to ₹30 Lakhs?

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

How can I claim tax exemption on gratuity while filing ITR?

If you are a salaried individual, you can use ITR-1 or ITR-2 and report the gratuity amount in the 'Salaries' Head. Enter the exempted amount under the ‘Income exempt under section 10’.

Is TDS deducted on gratuity amounts?

Yes, the employer will deduct TDS on gratuity. But this is only if the amount that exceeds the exempted amount mentioned under Section 10(10) of the Income Tax Act.