Meaning

Gratuity is a lump sum amount paid by an employer to an employee upon their retirement, resignation, or death in service. It is a statutory right for employees who have completed a minimum of five years of continuous service with an organization. It is governed by the Payment of Gratuity Act, 1972. 

How is Gatuity Exemption Calculated

For Employees covered under the Payment of Gratuity Act 1972

Least of the Following is allowed as Expemtion

• Rs. 20 lakhs (which has been hiked from Rs. 10 Lakh as per the amendment);
• Gratuity Actually received
• (Last Drawn Salary*Years of Service*15)/26

Note:

1. Salary refers Basic Salary+DA.
2. In case of calculation of tenure of service completed in the company, if the employee has covered for more than 6 months then the tenure shall be rounded off to 1 year.
3. In case of calculation of tenure of service completed in the company, if the employee has covered for less than 6 months then the tenure shall be ignored.

E.g:- Gratuity actually received by the employee = Rs. 12 lakhs
         Last drawn salary + Dearness Allowance = Rs.45,000.
         Tenure of service to the company = 18 years 9 months.

Assuming that employee is covered under the Payment of Gratuity Act, 1972.

Solu:

The least of the following amounts shall be exempt from tax:

• Rs. 20 lakhs
• Actual gratuity received = Rs. 12 lakhs
• Hence the maximum amount exempt from tax = Rs. 4,93,269.23

      Taxable gratuity = Rs. 12,00,000 - Rs. 4,93,269.23 = Rs. 7,06,730.77

      Taxable amount of gratuity shall be taxed as per the normal income slab rate applicable to the employee

For Employees not covered under the Payment of Gratuity Act 1972

Least of the Following is allowed as Expemtion

• Last 10 month’s average salary (basic + DA)* 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

Note:

1. An average salary of previous 10 months is considered
2. Number of years in service is rounded off to the nearest full year.

Government Employees

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