Tax Implications of Gratuity Payments: What Employees Should Know

Gratuity received by employees is taxable under the Income Tax Act 1961. For employees covered under the Payment of Gratuity Act, the tax exemption is up to ₹20 lakh. The taxability of gratuity depends on some factors:

• Employer type

• Years of service

• Applicable tax exemptions

Understanding the gratuity income tax rules can help employees maximise their benefits and plan better for financial security.

Employers pay gratuity, which is now tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. This recent amendment increased the exemption limit from ₹10 lakh. This action has provided higher tax relief to employees.

Under Section 10(10) of the Income Tax Act, gratuity received by an employee at retirement, resignation or death is tax-exempt up to a specified limit. The current exemption limit is ₹20 lakh.

You can calculate the payment of gratuity using this formula:

Gratuity = Last drawn salary × (15/26) × Number of years of service

Here, 26 represents the estimated working days in a month, and gratuity is based on 15 days' wages. Any gratuity received beyond the exempt limit (₹20 lakh) is taxable as per income tax rules.

• To qualify for retirement gratuity tax exemption, an employee must complete at least 5 years of continuous service.

• Gratuity is also payable upon resignation, superannuation, disablement or death.

• The 5-year condition does not apply in cases of disablement or death.

To claim gratuity tax exemption:

Confirm you meet the criteria, such as completing 5 years of continuous service, unless exempt due to death or disability.

Calculate the gratuity received using the formula (Last drawn salary × (15/26) × years of service).

Include the gratuity amount in your income tax return and mention the exempt portion under Section 10(10) for tax-free treatment.

Keep records of gratuity payments and supporting documents like Form 16, salary slips, or retirement documents for reference.

• Under the Payment of Gratuity Act, you can claim a tax exemption on gratuity up to ₹20 lakh under Section 10(10) of the Income Tax Act.

• The taxability of gratuity depends on the employer type, years of service and applicable tax exemptions.

• Employees must complete at least 5 years of continuous service to qualify for tax-exempt gratuity, except in cases of death or disability.

Gratuity is taxable in India, but significant exemptions apply depending on the type of employment and the amount received. 

• For government employees, the entire gratuity amount is fully exempt from income tax.

• For private sector employees, gratuity is tax-exempt up to ₹20 lakh.

• Any gratuity received over ₹20 lakh is taxable as Income from Salary in the hands of the employee.

• In case the gratuity is received by the legal heir upon the employee's death, it is treated as Income from Other Sources.

The exemption limit on gratuity tax in India is ₹20 lakh for private sector employees, as per Section 10(10) of the Income Tax Act. For government employees, the entire gratuity amount is fully exempt from income tax upon retirement, resignation, or death.

Gratuity tax calculation differs for government and private sector employees in India, mainly in terms of the exemption provided and the formula for calculation.

For Government Employees

• Central, state, or local government employees receiving it on superannuation, retirement, or death can enjoy a full exemption 

• There is no cap on the tax exemption for these employees, and the entire amount is exempted

For Private Sector Employees

• The exemption for gratuity depends on whether the employee is covered under the Payment of Gratuity Act, 1972

• The lowest amount from the following is tax-exempt:

Here are the documents you need to apply for gratuity:

• Gratuity payment advice or letter from the employer

• PAN card and identity proof 

• Service certificate

• Form 16 issued by the employer

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