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Taxation Rules for Gratuity in India

Understanding the taxation rules for gratuity is crucial for employees who receive this benefit upon retirement, resignation, or termination of employment. At GratuityCalculator.co.in, we simplify the complexities of gratuity taxation to help you make informed financial decisions.

Exemptions Under the Income Tax Act

Gratuity received by employees is subject to taxation under the Income Tax Act, 1961. However, certain exemptions apply depending on the type of employee and the amount of gratuity received:

  • Government Employees: Gratuity received by government employees (central, state, or local authorities) is fully exempt from tax.
  • Non-Government Employees: For non-government employees, the least of the following amounts is exempt from tax:
    • ₹20,00,000 (as per the latest amendment)
    • Actual gratuity received
    • 15 days' salary for each completed year of service (based on last drawn salary)

Any amount exceeding the exemption limit is taxable under the head "Income from Salaries."

Practical Example of Gratuity Taxation

Let’s understand how gratuity taxation works with a practical example:

Scenario:

  • Last Drawn Salary (Basic + DA): ₹60,000 per month
  • Years of Service: 15 years
  • Gratuity Received: ₹12,00,000

Step-by-Step Calculation:
  1. Calculate 15 Days' Salary for Each Year: (₹60,000 × 15 × 15) / 26 = ₹5,19,231
  2. Determine the Exemption Limit: The least of ₹20,00,000, ₹12,00,000 (actual gratuity), or ₹5,19,231 (15 days' salary).
  3. Exempt Amount: ₹5,19,231
  4. Taxable Amount: ₹12,00,000 - ₹5,19,231 = ₹6,80,769

Final Outcome: ₹6,80,769 will be added to the employee's income and taxed as per their applicable tax slab.

Key Points to Remember

While understanding the taxation rules for gratuity, keep the following points in mind:

  • Gratuity is taxable only if it exceeds the exemption limit specified under the Income Tax Act.
  • The ₹20,00,000 exemption limit applies to the total gratuity received during an employee's lifetime, not per employer.
  • Employees can claim tax exemptions by submitting Form 10E to their employer.
  • For non-government employees, the calculation of 15 days' salary excludes any allowances or perks beyond basic pay and dearness allowance (DA).