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Income Tax Exemption Rules on Gratuity

For more information about gratuities, which are one-time payments paid to employees by their employers to show gratitude for their services to the company, please read this blog.

Overview on Income Tax Exemption Rules on Gratuity

A gratuity is a bonus payment made by an employer to an employee in exchange for services performed by the company. It is paid at the time of retirement or resignation, provided the employee has worked for the company for at least five years without interruption. The norm of continuous 5-year service is sometimes waived, such as death or disability. Let’s know about Income Tax Exemption Rules on Gratuity in this blog.

Suppose you need a solid idea about India’s income tax exemption rules on gratuity payments. In that case, this article will make you understand every possible aspect of the same in detail. Now, what exactly is a gratuity payment? 

So, if you are fit to earn gratuities from your past employer, without much ado, read on to discover how you can go about it and what you can expect from it. This blog will also discuss the gratuity statute, eligibility requirements for employees, formulae for gratuity calculations, and the taxation restrictions on gratuity.

Who Can Enjoy the Benefit of Gratuity?

Gratuity benefits are available to employees who have worked for the company for five years or longer. The benefits of gratuity are available to employees at all times. However, this regulation is eased in circumstances of early death or disability, which may prevent the employee from continuing to work.

Income Tax Exemption Rules on Gratuity: How Does Gratuity Work?

Typically, the firm pays the gratuity out of its budget or purchases a group insurance plan. The employer pays the gratuity amount, unlike the employee Provident Fund, which includes the employee’s contribution.

A fixed proportion of the salary is computed and deposited in a gratuity account due later under the Payment of Gratuity Act 1972. It functions as a superannuation benefit for employees who leave the company. The Act covers all businesses with more than ten workers.

Resignation, retirement/superannuation, layoff or voluntary retirement, death, reduction, disability, or termination result in a gratuity payment. The funds are payable to the employee’s nominee in the event of death.

What Is the Amount of Maximum Gratuity?

As previously mentioned, employees are only entitled to loyalty rewards after five years of regular work, according to the Gratuity Act of 1972. A maximum of ₹20 lakhs in gratuity can be awarded to a single employee.

What Is the Applicable Income Tax on Gratuity Payments?

Gratuity payments are subject to Income tax returns online since they are considered part of an individual’s wage, taxable under current legislation. However, this tax is restricted since the government provides tax exemptions on gratuities earned under specific situations. Bonuses received by a nominee/heir on the death of an employee are subject to taxation since they fall under the “Income from other sources” category while calculating sources of Income tax.

If an LLP’s accounts require auditing under section 44AB, it is mandatory for them to file their income tax return electronically using a digital signature, and this can be done through ITR 5. Click here – ITR for LLP

Income Tax Exemptions for Government Employees’ Gratuities

Under current legislation, the gratuity paid by government workers on their superannuation, retirement, or termination is tax-free, but one should note that Foreign Income taxation in India is present. This applies to personnel of state and federal governments, those in the defence industry, and those working in any other field, such as those working under the local authority.

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Gratuity Tax Exemptions for Private-Sector Employees

Gratuity tax exemptions for private-sector employees depend on whether they are covered under the Payment of Gratuity Act of 1972. Based on these factors, the different tax treatment is offered.

Vakilsearch’s Income Tax Calculator India allows you to calculate your taxes quickly and submit them online.

Employees Who Work in the Private Sector but Are Covered by the Gratuity Act

Employees covered by the Act are entitled to a tax-free gratuity under certain conditions. The least priced of the three alternatives below is tax-free. A gratuity of ₹ 10 lakhs or a salary equivalent to 15 days of service or the actual gratuity paid for each year completed. If the gratuity amount exceeds the exemption limit, it will be taxed according to existing rules.

The Act does not cover the following Employees in the Private Sector. 

Specific exceptions are available to employees who are not covered by the Payment of Gratuity Act and must contain at least one of the following:

  • Received their gratuity in full
  • A ten-lakh-rupee sum as a bonus
  • A sum equivalent to half a month’s income is paid for each year of service.
  • Any amount over the minimum, as mentioned earlier, is taxed.

What Is a Gratuity Calculator?

The Gratuity Calculator would compute the gratuity amount using the formula for gratuity calculation.

Click Here to learn more about:

Gratuity Formula: (15 * your most recent wage * your length of service) / 26.

A gratuity calculator is a tool that calculates how much you’d get paid if you quit your employer after five years of service. It’s a helpful tool for calculating the gratuity when you leave the firm. You must enter the last received pay and the length of continuous service with the firm. 

Your base wage, dearness allowance, and sales commission are all included in your most recent drawn salary. In seconds, the gratuity calculator would display the gratuity amount. Anyone can use it, and there is no restriction on how many times you can use it. 

Few Instances of Calculating Gratuity

Gratuity = n*b*15 / 26 is the formula for computing gratuity for employees whose employer is covered by the Gratuity Act.

Where n is the years you’ve worked for the company, and b is the most recent basic wage + dearness allowance.

You have 15 years of experience with the XYZ corporation, for example. Your most recent basic wage was ₹ 30,000, including a dearness allowance. 

Hence: The gratuity is calculated as follows: 15 * 30,000 * 15 / 26 = ₹ 2,59,615/-


So, now you know about gratuities and the exemption rules posed by the Income Tax department in India. However, one thing to remember here is that excessive behaviour would be viewed as an ex-gratia. In addition, one can calculate income tax for pensioners to avail full benefits of the same. You are eligible for unemployment benefits if you have worked for more than six months in the past year.

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