Gratuity is a lumpsum amount provided to an employee which is payable when he/she completes 5 years of service in an organization. The exemption from taxability of Gratuity is covered section 10(10) of the Income Tax act. Any amount received as gratuity during the service of the employee is fully taxable and not exempt. In case of Gratuity received at the time of retirement/superannuation, the exemption can be classified into two categories of employees :
For Central/State Govt. Employees
For Other employees not covered in 1 above
1.For Central/State Govt. Employees - Any amount received as gratuity at the time of retirement/superannuation is fully exempt without any limit. 2. For Other Employees - There can be two situations in this category which are as under : (a) Whether the employee is covered under payment of Gratuity Act,1972 (b) Whether the employee is not covered under payment of Gratuity Act,1972 We shall take each situation one by one : (a) Employee is covered under payment of gratuity Act, 1972 In this case, the exemption is available as per section 10(10)(ii) of Income Tax Act being the least of the following :
Actual Gratuity Received
Rs. 20 lacs
Last drawn Salary (salary+DA)*15/26*No of years of Service
(b) If the Employee is not covered under payment of Gratuity Act,1972 In this case, the exemption is available as per Section 10(10)(iii) of the Income Tax Act being the least of the following :
Actual Gratuity Received
Rs. 20 lacs
Salary based on last 10 months * 1/2 month * No. of completed year of Service
The above limit of 20 lacs has been recently increased from 10 lacs vide Notification No. S.O.1213(E) dtd. 8th March,2019.
