Income Tax Exemptions on Gratuity: Eligibility Criteria, Taxability and Exemption

If a professional has worked in an organisation for more than five years now, they might be aware of gratuity. They might Google questions like these:

• Is gratuity taxable or not?
• Is gratuity taxable in India?
• What is tax exemption on gratuity?
• How to go about tax exemption calculation? And so on. 

Here is a brief explanation of the gratuity taxable limit, gratuity exemption and more. 

What is gratuity? 

Gratuity is defined as per Section 10(10) of the Income Tax Act. It is a benefit given to an employee who has completed at least 5 years of continuous service in a company. The employer provides this benefit after the employee’s employment is terminated. The employment termination eligible for gratuity are superannuation, resignation or retirement, death, and disablement caused due to accident or disease. 

Is gratuity taxable?

An employee who has rendered continuous service for at least five years is paid gratuity as a token of gratitude from the employer. So, just like any other income, gratuity is taxable above a certain threshold. 

While filing taxes, the gratuity component would be placed under the ‘salaries’ head. Therefore, the gratuity would be treated as ‘income from other sources’ while calculating the individual’s tax liability. 

As per the earlier government provisions, tax on gratuity was applicable after a ceiling of ₹10 lacs. This limit on gratuity exemption is now increased to ₹20 lacs. This increase in the gratuity tax exemption ceiling has come after the Central Board of Direct Taxes (CBDT) notification S.O. 1213(e), which was dated March 8, 2019. 

The new gratuity exemption limit applies to whom?

The new gratuity taxable exemption ceiling of ₹20 lacs applies to employees whose employment was terminated on or after March 29, 2018, due to superannuation, resignation, death or disablement. This provided an advantage to employees with a higher salary after retirement. Gratuity in income tax was reduced after the gratuity taxable ceiling was moved upwards. Thus, the gratuity income tax could be reduced.

What are the aspects of gratuity exemption?

So, is gratuity taxable in India? The answer to this question is yes, gratuity is taxable. Here is moving further to the gratuity exemption section. 

Firstly, it is important to note that government employees do not have to pay any income tax on gratuity. For non-government or private sector employees, gratuity exemption applies up to a certain ceiling amount. This gratuity taxable limit depends on whether they are covered under the Payment of Gratuity Act 1972 or not. 

Private sector employees are covered under the Gratuity Act for the least of the following:

• The gratuity amount of ₹20 lacs
• Last fifteen days’ salary multiplied by the number of years of employment
• Actual gratuity received 

Gratuity exemption for private sector employees would apply for the least of the above-mentioned amounts. 

How to use a gratuity exemption calculator?

If one is confused about whether their gratuity is taxable or not, they can use different gratuity exemption calculators available online. While using gratuity calculator, individuals can use their salary (basic + dearness allowance).

Conclusion

So, is the gratuity amount taxable? The answer to this question is ‘it depends on whether you are a government or a private sector employee’. The gratuity exemption section above should be useful to calculate a person’s gratuity exemption and gratuity taxable limit. 

FAQs on Gratuity Taxable and Gratuity Exemption