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June 12, 2021

How much Gratuity is Exempt and how much it taxed?

by Mahesh Mara in Income Tax

How much Gratuity is Exempt and how much it taxed?

Gratuity is a benefit given by the employer to employees. Gratuity is 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:

  • On attainment of superannuation i.e. an employee who attains the age of retirement is said to be in superannuation)
  • On retirement or resignation
  • 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.

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. In this article we will the know the taxation provision with respect to gratuity income.

How much exemption is available to employees with respect to gratuity?

Below is the exemption available to various types of employees u/s 10(10):

1. Government Employees

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

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.

Below is the maximum the amount of gratuity exempted from tax in the hands of employees who are covered under the Payment of Gratuity Act(POGA):

Maximum Gratuity exempt is least of the following:

  • Last salary (Basic salary + Dearness Allowance) X number of years of employment X 15/26; or
  • Rs. 20 lakhs; or
  • Gratuity Actually received

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.

Below is the maximum the amount of gratuity exempted from tax in the hands of employees who are covered under the Payment of Gratuity Act(POGA):

Maximum Gratuity exempt is least of the following:

  • Last 10 month’s average salary (Basic salary + Dearness Allowance with respect to retirement) X Number of years of employment X 1/2; or
  • Rs. 10 lakhs (the limit of Rs 20 lakhs is not applicable for employees not covered under the Payment of Gratuity Act); or
  • Gratuity actually received

Note:

  • Gratuity received during the employment is fully taxable in the hands of the employee
  • In both case i.e. whether employees covered under Payment of Gratuity Act or not  a gratuity is receivable only after working continuously for 5 years. A part of this gratuity can be taxable depending on how much money you have received.
  • 1st proviso to sec 10(10)- Where Gratuity is received from 2 or more employer in the same year then the aggregate amount of gratuity exempt from tax would not exceed Rs 20 lakhs
  • 2nd proviso to sec 10(10)- Where gratuity is received in any earlier year from former employer and again received from same/ another employer in a later year the limit of Rs 20 lakhs will be reduced by the amount of gratuity exempt earlier

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