Taxability of Gratuity under Income Tax

TAXABILITY OF GRATUITY UNDER INCOME TAX

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 in 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.

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In case of Gratuity received at the time of retirement/superannuation, the exemption can be classified into two categories of employees :

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 the Income Tax Act being the least of the following :

1.Actual Gratuity Received

2. Rs. 20 lacs

3.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:

1.Actual Gratuity Received

2. Rs. 20 lacs

3.Salary based on last 10 months * 1/2 month * No. of the 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.

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