Gratuity Tax Exemption Rules

What is Gratuity?

Gratuity is the monetary benefit given by the employer to employees. As per the recent amendment under Section 10(10) of the Income Tax Act, 1961, the centre has increased the limit of gratuity to Rs. 20 lakhs from the previous ceiling of Rs. 10 lakhs. The new exemption limit of Rs. 20 lakhs is applicable to employees in case of retirement/death/resignation or disablement on or after 29th March 2018.

Gratuity is governed by the Payment of Gratuity Act, 1972. It is not paid on a monthly basis as it is not part of the monthly salary. It is only given in case of the following events:

Superannuation - An employee who attains the age of retirement
Retirement or Resignation
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)

Note: It is mandatory for employees to have completed a minimum of 5 years in the company to be eligible for gratuity.

Who is covered under the Gratuity Act?

All employees 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 comes under the Gratuity Act and is eligible for gratuity.

Calculation of amount of gratuity exempted from tax:

The least of the following options is exempt from tax:

Last salary (Basic + Dearness Allowance) x Number of Years of Employment x 15/26
Rs. 20 lakhs (which has been hiked from Rs. 10 Lakhs as per the amendment)
Gratuity Actually Received

15/26 = 15 days salary based on the salary last drawn for every completed year of service or part thereof.

Who is not covered under the Gratuity Act?

Even if the organisation is covered under the Gratuity Act, there is no such restriction which prevents an employer from paying gratuity to the employees.

Calculation of amount of gratuity exempted from tax:

The least of the following options is exempt from tax:

Last 10 month’s average salary (Basic + Dearness Allowance) Number of Years of Employment 1/2
Rs. 10 lakhs (the hike to Rs 20 lakhs is not applicable for employees not covered under the Payment of Gratuity Act)
Gratuity Actually Received

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

Conclusion

Now that you are aware of Gratuity, it is wise to check with your employer if the company comes under the Gratuity Act in order to avail maximum benefits.