Income Tax on Gratuity payment

Let us discuss the Income Tax on Gratuity Payment in India, the rules, exemption and deduction thereof.

Gratuity is a amount which is paid by an employer to his employee for his past services when the employment is terminated. When the employment comes to an end due to the retirement or superannuation of the workers, it becomes a good help to the employee to meet the new situation which often comes due to reduction in regular earnings or even total stoppage of earnings.

In case of death of the worker, it provides financial assistance to the members of his family for their survival, if they have got no other means for their survival.

 

Income Tax on Gratuity Payment in India

Any death cum retirement gratuity received by Central / State Government Employees is fully exempt from tax. Taxability of Gratuity in other cases is mentioned below.

You may also want to download the Income Tax on Gratuity Calculator.

grcalc

Non-government employees covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity is exempt from tax to the extent of least of the following:

(i) Rs. 10,00,000

(ii) Gratuity actually received

(iii) 15 days’ salary based on last drawn salary for each completed year of service or part thereof in excess of 6 months

Salary for this purpose means basic salary and dearness allowance. No. of days in a month for this purpose, shall be taken as 26.
The Calculation then shall be 15/26 * Last Month Salary * No of years of Completed Service or part there of in excess of six months.

Non-government employees not covered by the Payment of Gratuity Act, 1972

Any death cum retirement gratuity is exempt from tax to the extent of least of the following:

(i) Rs. 10,00,000

(ii) Gratuity actually received

(iii) Half month’s salary (based on last 10 months’ average salary immediately preceding the month of retirement or death) for each completed year of service (fraction to be ignored)

Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits, forming part of salary and commission which is expressed as a fixed percentage of turnover.
The Calculation shall be 1/2 * Average of Last 10 Months Salary * Completed year of service (ignoring fractions)

Additional Points to Remember

  • Gratuity received during the period of service is fully taxable.
  • Where gratuity is received from 2 or more employers in the same year then aggregate amount of gratuity exempt from tax cannot exceed Rs. 10,00,000.
  • Where gratuity is received in any earlier year from former employer and again received from another employer in a later year, the limit of Rs. 10,00,000 will be reduced by the amount of gratuity exempt earlier.
  • The exemption in respect of gratuities would be available even if the gratuity is received by the widow, children or dependents of a deceased employee.

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