Taxability of Gratuity Received by an Employee

Gratuity is a lump-sum payment made by an employer to an employee as a token of appreciation for long-term service. Its tax treatment depends on:

1. Type of employee(government/private sector).
2. Coverage under the Payment of Gratuity Act, 1972.
3. Amount received vs. exemption limits.

1. Tax Exemption Rules for Gratuity

1. Government Employees

• Fully exemptfrom tax, regardless of the amount received.

1. Private Sector Employees

(i) Covered under the Payment of Gratuity Act, 1972

The least of the following is exempt:

1. ₹20 lakh(lifetime limit).
2. Actual gratuity received.
3. 15 days’ salaryfor each completed year of service:

 (Note: Part of a year >6 months is rounded up).

(ii) Not Covered under the Gratuity Act

The least of the following is exempt:

1. ₹20 lakh(lifetime limit).
2. Actual gratuity received.
3. ½ month’s average salaryfor each completed year of service:

(Note: Ignore partial years).

2. Examples of Gratuity Tax Calculation

Example 1: Private Employee Covered under Gratuity Act

• Last salary (Basic + DA):₹50,000/month
• Years of service:20 years
• Gratuity received:₹18 lakh

Calculation:

1. Exempt as per formula:

1. Statutory limit:₹20 lakh
2. Actual received:₹18 lakh

Taxable Gratuity:

• Exempt amount (least of above):₹5,76,923
• Taxable portion:₹18,00,000 – ₹5,76,923 = ₹12,23,077.

Example 2: Private Employee Not Covered under Gratuity Act

• Average salary (last 10 months):₹60,000/month
• Years of service:25 years
• Gratuity received:₹22 lakh

Calculation:

1. Exempt as per formula:

1. Statutory limit:₹20 lakh
2. Actual received:₹22 lakh

Taxable Gratuity:

• Exempt amount (least of above):₹7,50,000
• Taxable portion:₹22,00,000 – ₹7,50,000 = ₹14,50,000.

Example 3: Government Employee

• Gratuity received:₹25 lakh
• Taxable amount:₹0 (fully exempt).

3. Key Points to Remember

1. Lifetime Limit:The ₹20 lakh exemption applies cumulatively across all employers.
2. Early Resignation:Employees with 4 years & 240+ days of service qualify for gratuity (deemed 5 years).
3. Death/Disability:Gratuity is paid even if service is <5 years, with full exemption.
4. New Tax Regime:Exemption rules remain the same under both old and new regimes.

Summary Table: Taxability of Gratuity