Understanding Section 10(10)
Section 10(10) provides tax exemption on gratuity payments received by employees. Gratuity is a lump sum amount paid by employers as a reward for long service.
Key Features
✔ Who Can Claim?: All employees (government and private sector)
✔ Exemption Limits: Vary for different categories of employees
✔ Purpose: Retirement benefit for long-term service
Types of Gratuity & Their Tax Treatment
- Government Employees
- Full exemption: No limit on tax-free gratuity
- Example: A retiring IAS officer receives ₹25 lakhs gratuity → 100% tax exempt
- Private Sector Employees Covered Under Payment of Gratuity Act, 1972
- Exemption: Least of:
- 15 days salary for each year of service
- ₹20 lakhs (current limit)
- Actual gratuity received
- Calculation: (Last drawn salary × 15/26) × Years of service
Example:
- Last salary: ₹1,00,000/month
- Service years: 20
- Gratuity received: ₹18 lakhs
- Calculation: (1,00,000 × 15/26) × 20 = ₹11,53,846
- Exempt amount: ₹11,53,846 (lowest of ₹11.53L, ₹20L, ₹18L)
- Taxable amount: ₹18L – ₹11.53L = ₹6,46,154
- Private Employees Not Covered Under Gratuity Act
- Exemption: Least of:
- Half month’s average salary for each year of service
- ₹20 lakhs
- Actual gratuity received
- Calculation: (Average 10 months salary × ½) × Years of service
Example:
- Average salary: ₹90,000/month
- Service years: 25
- Gratuity received: ₹22 lakhs
- Calculation: (90,000 × ½) × 25 = ₹11,25,000
- Exempt amount: ₹11,25,000 (lowest of ₹11.25L, ₹20L, ₹22L)
- Taxable amount: ₹22L – ₹11.25L = ₹10,75,000
Key Points to Remember
✅ Salary Components: Basic + DA only (other allowances not included)
✅ Service Period: Rounded to nearest full year (>6 months = 1 year)
✅ Multiple Employers: Exemption available separately from each employer
✅ Death Cases: Full gratuity exempt without limit
Recent Changes
- Limit increasedfrom ₹10 lakhs to ₹20 lakhs (Budget 2023)
- Applies to retirements/resignations after 1st April 2023
Documentation Required
- Form 10BA (for private sector employees)
- Employer’s gratuity payment certificate
- Service proof documents
