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Gratuity is a voluntary payment made by an employer to employee as an appreciation of service rendered by such employee. In general words, gratuity is large amount of gift that is given to an employee by employer on retirement of employee after serving the organisation for a specified period.

Unlike provident funds, Gratuity is entirely paid by employer without the contribution from employee. Gratuity is payable by each organisation, whether government or not, which have MORE THAN 10 employees. However, an organisation having 10 or lesser employees may also provide gratuity to its employees but it is not mandatory for such organisations.

Amount so received as gratuity is taxable under Income Tax Act,1961. However, exemption is also provided in certain cases.

Eligibility Criteria for Payment of Gratuity

  • Employee must be eligible for superannuation fund.
  • Employee should retire from service.
  • Employee at least serves an organisation for a continuous period of 5 years.

*In case of death of employee, his nominee would be eligible for receiving gratuity on behalf of such employee.

Taxability of Gratuity

Entire amount received as gratuity is taxable as per Income Tax Act,1961.

Exemption under Gratuity

1. If Gratuity is received during the period of employment then NO exemption will be provided to any employee whether employee of government firm or others.

2. If Gratuity is provided after retirement to the employees of any government firm then it is FULLY EXEMPT for tax purposes.

3. If Gratuity is provided after retirement to the employees of any organisation ,other than employees of government organisation, then exemption will be provided on following basis:

  • If the employers are covered under Payment of Gratuity Act,1972 then exemption will be LEAST of following:

a) Actual gratuity received

b) Rs.20,00,000

c) 15*last drawn salary*tenure of working#/26

# Tenure of working is no. of years or part thereof in excess of 6 months for which employee provide service to company

  • If the employer are NOT covered under Payment of Gratuity Act,1972 then exemption will be least of following:

a) Actual gratuity received

b) Rs.20,00,000

c) 15*last drawn salary*tenure of working#/30

# Tenure of working is no. of years or part thereof in excess of 6 months for which employee provide service to company

For Example: Mr. Ravi retired on 15.06.2022 after completion of 26 years and 8 months of service and received gratuity of Rs.15,00,000. At that time his salary was Rs,50,000. Compute his exemption under gratuity if:

a) He is private sector employee covered by Gratuity Act.

b) He is private sector employee NOT covered by Gratuity Act.

c) He is Government sector employee.

ANSWER:

a) When Mr. Ravi is private sector employee covered by Gratuity Act, his exemption will be least of following:

I. Gratuity received = 15,00,000

II. Threshold limit = 20,00,000

III. Eligible Gratuity = 15*last drawn salary*tenure of working/26

= 15*50,000*27/26
= 7,78,846

b) When Mr. Ravi is private sector employee NOT covered by Gratuity Act, his exemption will be least of following:

I. Gratuity received = 15,00,000

II. Threshold limit = 20,00,000

III. Eligible Gratuity = 15*last drawn salary*tenure of working/30

= 15*50,000*27/30
= 6,75,000

The author can be however contacted for further clarification at 9654182791 or via mail at caajay92@gmail.com

DISCLAIMER:- This Blog is for the purposes of information / knowledge and shall not be treated as solicitation in any manner or of for any other purposes whatsoever.

Author Bio

I run my own Firm at Roshanara Road Near by kamla Nagar , Delhi. My Contact No 9654182791 and Email Id caajay92@gmail.com I am in Practice Since 2017. I am also a Founder of Solution Tax View Full Profile

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6 Comments

  1. Pavithra says:

    My company is liquidated so i could complete 4 years and 11 months of service. am not able to continue service for 5 year due to liquidation of my company. is any gratuity received is taxable or exempt?

  2. Darshan Singh says:

    Gratuity received from previous employer in private sector after completing regular service of 8 years is exempt from income tax or not.
    please guide me.

  3. Naman says:

    194/6/73-IT(A-1) Dated 19.06. 73 exemption in respect of gratuity is permissible even in cases of termination of employment due to resignation. The taxable portion of gratuity will qualify for relief u/s 89(1) So, please specify that. Else people will misrepresent as if gratuity is received due to resignation on job change same is taxable.

  4. nitin bhardwaj says:

    i am nitin bhardwaj job in ICICI bank limited , after five year i job VRS in ICICI bank limited, i received GRATUITY FUND RECEIVE RS. 56354/- FY2022-2023, request Please tell me gratuity fund are taxable or non taxable

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