# How to Calculate Gratuity and its Tax Treatment

## 1. How to Calculate Gratuity

### a)  In respect of Employees covered Under the Payment of Gratuity Act, 1972:

As per the Act, the gratuity amount is 15 days’ wage multiplied by the number of years put in by you. Here wage refers to basic salary plus dearness allowance. Take the monthly salary drawn by you last (basic + dearness allowance) at the time of resignation or retirement. Divide this by 26. This gives you your daily salary. Multiply this amount by 15 days, and further by the number of years of service you have put in.

If you have put in 10 years and seven months in an organisation, your service period will be taken to be 11 years. But if your service tenure is 10 years and five months, then for the purpose of this calculation your tenure will be taken to be 10 years only.

Take an example. Suppose that your average monthly salary is Rs 26,000. Your daily salary will be Rs 1,000. Multiply this by 15 and then by 10. The gratuity you are entitled to after 10 years of service will be Rs 1.5 lakh.

Formula :- Gratuity shall be calculated as per the below formula:

Gratuity = Last drawn salary x 15/26 x No. of years of service

### b) In respect of Employees not covered Under the Payment of Gratuity Act, 1972:

For non-government employees, who are not covered under this Act, the manner of calculating gratuity is different. First, the average salary is calculated: for this the average of last ten months’ salary is taken (this will include the basic plus dearness allowance plus commission as a percentage of turnover achieved by the employee). Divide this average salary by 30 (ignore fractions). Now, multiply this amount by 15 and further with the number of years of service put in. Dividing the daily salary by 30 instead of 26 does put those not covered by the Gratuity Act at a disadvantage.

Formula :- Gratuity shall be calculated as per the below formula

Gratuity = Last drawn salary x ½ x No. of years of service

Your last drawn salary will comprise your basic + DA+ commission on sales on turnover basis. For computation of gratuity, your service period will not be rounded off to the nearest full year. While calculating completed years, any fraction of the year will be ignored. For instance, if the employee has a total service of 20 years, 10 months and 25 days, only 20 years will be factored into the calculation.

## 2. What is the Tax treatment of Gratuity?

For the purpose of exemption of gratuity under sec.10 (10) the employees are divided under three categories:

### A) In Respect of Government Employees

Any death cum retirement gratuity received by Central and State Govt. employees, Defense employees and employees in Local authority shall be exempt.

### B) In Respect of Non Government Employees covered by Payment of Gratuity Act

Gratuity amount received by non government employees covered by the Payment of Gratuity Act is tax free up to the least amount of the following:

• Amount of gratuity paid, or
• 15 days salary for every completed year of employment (salary is the amount of last salary drawn)
• Rs 20 lakh (Limit increased to Rs. 20 Lakh with effect from 29.03.2018, earlier limit was Rs. 10 Lakh.)

### C) In Respect of Voluntary Payment of Gratuity to Employees not covered by Payment of Gratuity Act

Where companies pay gratuity voluntarily to employees who are not eligible to receive gratuity under the Act, such amount is tax free up to the least amount of the following:

• Amount of gratuity paid, or
• Half month’s salary for every completed year of employment (salary is average salary received in the last 10 months of service.)
• Rs 10 lakh

Ø  The 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). Gratuity payment to a widow or other legal heirs of any employee who dies in active service shall be exempt from income tax subject to provisions mentioned above.

Ø  The ceiling of Rs. 10 lakh / 20 Lakh applies to the aggregate of gratuity received from one or more employers in the same or different years.

## 3. Under What head Gratuity is Taxable?

Gratuity received by an employee on his retirement is taxable under the head “Salary” and gratuity received by the legal heir is taxable under the head “Income from Other Sources”.

## 4. Frequently Asked Question on Taxation of Gratuity

QUESTION: I am a pensioner from Maharashtra State Government. I retired in December  2015 receiving an amount of Rs. 10,00,000 as gratuity. But I received a further amount of Rs. 1.20 lakhs in April 2018 consequent on revision of pay. At the time of my retirement the exemption limit was Rs. 10 lakh. Am I eligible for the higher exemption limit under Sec. 10(10) available at the time of receipt. The higher limit of Rs. 20  lakhs is raised by  Notification No. S.O. 1420 (E) dated 29.03.2018

ANSWER:  Every time the limit has been raised, such limit has only referred to the retirement on or after the date on which it was raised. Hence the limit on the date of retirement time would alone have to be considered, so  exemption with reference to the enhanced limit will not apply to the reader’s case. It is stated that the reader is a government pensioner. There is no ceiling for Central or State pensioners. If the reader is a retiree from the civil service of a State or held a civil post under a State or had even been an employee of a local authority, the gratuity amount, that is received, is totally exempt vide Sec. 10(10)(i) of the Income-tax Act irrespective of the date of retirement or the notification.

Further for Government pensioners maximum Gratuity amount was increased to Rs. 20 Lakh Lacs with effect from 01/01/2016 under 7th Pay Recommendations as one of the Employees Welfare Measures to compensate raising inflation over the period. Remember this is Maximum amount which they can receive as Gratuity but their is no ceiling on Tax exemption for Gratuity for Central or State pensioners.

(Republished With Amendments)

### Posted Under

Category : Income Tax (27505)
Type : Articles (17008)

### 16 responses to “How to Calculate Gratuity and its Tax Treatment”

1. vipan mahajan says:

Sir, I retired from psu Bank on 30th Sep 2017. In view of amendment of 29th March 2018, do I qualify for exemption limit of Rs 20 lac for the FY ended Mar 2018.

• Natarajan K. says:

How much gratuity you actually got?

2. ajit arsekar says:

I have retired in November2016.Gratuity recd is Rs12.90 lacs. Can I bifurcate the same in 3yyrs and take income tax relief for amt above Rs 10/- lacs .please send reply on my email with details.

3. raj says:

I have query regarding income tax norms on gratuity, In the case, when we receive gratuity on below 5 years of service in pvt company. (4 years & 240 days norms)

I worked for a IT company around 4.10 years,then I switch to other company. Now, as part of FFS with previous company , I got my gratuity amount as per gratuity norms.(4 years & 240 days.)

Here, Company deducted income tax on credited gratuity amount and they told me that” I have served below five year ,hence Gratuity amount is taxable”.

Is gratuity amount taxable in above case ? It not then please let me know “what shall i do “?

Regards
Thanks

4. rajveer says:

I have query regarding income tax norms on gratuity, In the case, when we receive gratuity on below 5 years of service in pvt company. (4 years & 240 days norms)

I worked for a IT company around 4.10 years,then I switch to other company. Now, as part of FFS with previous company , I got my gratuity amount as per gratuity norms.(4 years & 240 days.)

Here, Company deducted income tax on credited gratuity amount and they told me that” I have served below five year ,hence Gratuity amount is taxable”.

Is gratuity amount taxable in above case ? It not then please let me know “what shall i do “?

Regards
Thanks

5. shrutika says:

Hello

If i complete 5year in a company and than resign , but first six months are probation perios then will i be eligible for gratuity , i mean to say that rounded off rule is applicale to gratuity eligiblity or not.

6. S says:

Sir,
My husband is passed away in April. He was school teacher in aided school in Maharashtra. His recruitment was after 2005 so he was not eligible for Pension (as per his school clerk) and even he is not getting any benefit i.e. Death Gratuity, Leave Encashment & others… His total service is 7 years.
My question is, whether school is cheating me or really he is not applicable for any benefit?

7. Vikas Himatsingka says:

sir, 12 months back I have completed 9 years in a private organisation and resigned and withdrawn my pf amount including pension fund. I did not claim for gratuity at that moment neither the company reimbursed me. Later, on after 4 months Company called me back and I joined.

Sir, now when i retire or leave the company whether I will be eligible for previous period of service of Gratuity.

Time frame for calculating Gratuity.

8. Anupriya says:

Hi,
Please confirm the tenure to be considered for gratuity calculation if a person has completed 10 years, 5 months and 28 days of service.

Regards,
Anupriya

9. p k chatterjee says:

D/Sir I have certain queries about computation of gratuity.For e.g. if an employee A worked in an orgn. 32 yrs 5 months 20 days what will be the methodology of calculation of gratuity. As far as I am concerned :
1st 30 ys @ 15 days per completed year i.e. 30×15= 450 days, rest 2 yrs @ 26 days per completed yr i.e. 26×2=52 days and balance 20 days x26/14. Is it the correct formula to calculate the gratuity. Kindly let me know the procedure. Hope I will get a reply from your end.

Thanking you
PKC

10. Ravi says:

Dear Sir,

I have a query.Have completed 9 years 10 months in my current service.I have still not resigned but my organisation has asked me to resign.
Will i be eligible for 10 years gratuity under the following cases.

1> Resign immediately and do not complete 10 years viz complete only 9.10 years.
2> Resign immediately and serve 90 days notice period.
3> Resign after completing 10 years.

FYI : DOJ is 25th October 2005

11. pavan agrawal says:

Hello

If i complete 4 year 7 months in a company and than resign , will i be eligible for gratuity , i mean to say that rounded off rule is applicale to gratuity eligiblity or not.

12. Manish says:

In gratuity formula (Basic + da) x 15 x no of years of service / 26

what stands for 26 taken for dividation.

13. Bhartesh says:

Can you please elaborate the difference between

In Respect of Non Government Employees covered by Payment of Gratuity Act

and

In Respect of Voluntary Payment of Gratuity to Employees not covered by Payment of Gratuity Act

Thx

14. srikanth says:

sir am ksrtc employee of karnataka state i got retire on 30-09-2012 and received gratuity of rs 1200000 whether it is taxable r not

15. raj malhotra says:

sir i have few queries for you. please provide a solution.
sir,

i was a public sector bank employee. i retired in year 2006. i received gratuity payment in 2007. again gratuity as arrears is received by me in december 2010. i would like to ask you Whether the concept of pension (defined or otherwise) makes any distinction between the pension benefit available to Central Government employees and Public Sector Banks or Public Sector Undertakings?
whether public sector bank employee are central or state employees for purpose of graduity treatment?

2. Is it a fact that the ceiling of gratuity payable to Central Government Employees has been enhanced from Rs. 3.5 lac to Rs. 10 lac with effect from 01/01/2006?

3. Is it also a fact that gratuity payable to employees of Public Sector Banks, Public Sector undertakings and other organizations has been enhanced from Rs.3.5 lac to Rs.10 lac w.e.f 24/05/2010?

sir i would like to know whether public sector bank employee can claim an exemption of 10 lakhs where he has retired in year dec 2006 as this celing has been enhanced with retrospective effect from 1.1.2006.

whether i can claim back any amount of tax paid previously on gratuity as ceiling has been enhanced retrospectively?