Gratuity is a voluntary payment paid to employees by the employer in appreciation of services rendered in the past. Its taxable in the hands of employee under the head income from salaries. However, its exempted from income tax under section 10(10) of the IT act, 1961.
As per section 10(10), in following cases any death-cum-retirement gratuity received by following person is fully exempted;
- Government employees
- Received under the pension code regulations applicable to members of the defense service.
In the case of non-government employees, exemption is calculated based on certain factors.
Exemption when employee covered by the payment of gratuity act, 1972
If the employee is covered under the gratuity act 1972, least of following is exempted;
- Actual gratuity received by the assessee
- Rs 10,00,000
- 15/26 * last drawn salary * number of years of completed service or part thereof in excess of 6 months
Balance left out after deducting exempted portion is taxable under the head income from salaries. Salary for the purpose of above exemption calculation means basic salary plus dearness allowance.
Example
Mr X an employee of ABC limited receives Rs 2,50,000 as gratuity under the payment of gratuity act, 1972. He retires after rendering service of 30 years and 3 months. His last drawn salary was Rs 6000 per month.
Computation:
| Particulars | Amount in Rupees | |
| A | Actual gratuity received | 2,50,000 |
| B | Less: Exemption Under section 10(10) | |
| i) Rs 2,50,000 | ||
| ii) Rs 10,00,000 | ||
| iii) (15/26)*6000*30 = Rs 1,03,846 | ||
| Least of the above three is exempted | (1,03,846) | |
| C | Taxable (A-B) | 1,46,154 |
Exemption in all other cases
Any gratuity received on death, termination, resignation or retirement of an individual who is not covered by the payment of gratuity act, 1972 is eligible for exemption under section 10(10) of the income tax act, 1961. As per this section least of the following is exempted;
- Actual gratuity received by the individual
- Rs 10,00,000
- ½ * average salary for 10 months preceding the month of retirement * number of years of completed service
Salary for above exemption calculation means basic salary plus dearness allowance if provided in terms of employment plus commission as a percentage of turnover achieved by the employee. Basic salary shall be the average of the last 10 months salary.
Example
Mr Y an employee of XYZ limited receives Rs 2,50,000 as gratuity after rendering service of 30 years and 3 months. He is not covered by the Payment of Gratuity Act, 1972. His average monthly salary during the last 10 months of service was Rs 6,000.
Computation:-
| Particulars | Amount in Rupees | |
| A | Actual gratuity received | 2,50,000 |
| B | Less: Exemption Under section 10(10) | |
| i) Rs 2,50,000 | ||
| ii) Rs 10,00,000 | ||
| iii) (1/2) * 6000 * 30 = Rs 90,000 | ||
| Least of the above three is exempted | (90,000) | |
| C | Taxable (A-B) | 1,60,000 |
If during the previous year, you have received gratuity from more than one employer, then exemption will be restricted up to the exemption limit as discussed above.
In case assessee has claimed exemption under section 10(10) in earlier years for the amount received from previous employers, then the maximum limit of Rs 10,00,000 will be reduced by the exemption already availed and accordingly new exemption limit will be calculated.
