Is Gratuity Taxable in India? Employee Gratuity Taxation and Exemption Limits Explained

Gratuity received by employees is taxable under the Income Tax Act 1961. For employees covered under the Payment of Gratuity Act, the tax exemption is up to ₹20 lakh. The taxability of gratuity depends on some factors:

• Employer type

• Years of service

• Applicable tax exemptions

Understanding the gratuity income tax rules can help employees maximise their benefits and plan better for financial security.

Employers pay gratuity, which is now tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act. This recent amendment increased the exemption limit from ₹10 lakh. This action has provided higher tax relief to employees.

Under Section 10(10) of the Income Tax Act, gratuity received by an employee at retirement, resignation or death is tax-exempt up to a specified limit. The current exemption limit is ₹20 lakh.

In cases of death or permanent disability, gratuity becomes payable even if the employee has not completed five years of continuous service. From a tax perspective, gratuity received by the nominee or legal heir on the death of an employee is fully exempt from income tax, regardless of the amount or the length of service. 

This exemption applies uniformly across government and non-government employees, ensuring immediate financial relief to the family during a difficult time. Similarly, when gratuity is paid due to permanent disablement of the employee, the five-year service condition is waived, and the payment is treated as a retirement-related benefit. 

For government employees, the gratuity received is fully exempt from tax. For non-government employees covered under the Gratuity Act, the exemption is allowed up to the least of ₹20 lakh, the statutory formula amount, or the gratuity actually received, with any excess becoming taxable as salary income.

You can calculate the payment of gratuity using this formula:

Gratuity = Last drawn salary × (15/26) × Number of years of service

Here, 26 represents the estimated working days in a month, and gratuity is based on 15 days' wages. Any gratuity received beyond the exempt limit (₹20 lakh) is taxable as per income tax rules.

• To qualify for retirement gratuity tax exemption, an employee must complete at least 5 years of continuous service.

• Gratuity is also payable upon resignation, superannuation, disablement or death.

• The 5-year condition does not apply in cases of disablement or death.

The Payment of Gratuity Act, 1972, governs gratuity payment rules in India. It ensures statutory retirement benefits for eligible employees and fixes employer obligations.

• Gratuity applies to establishments with 10 or more employees

• Eligibility arises after five years of continuous service, except for death or disability

• Gratuity equals 15 days’ wages for each completed year of service

• Salary includes basic pay and dearness allowance only

• The maximum gratuity payable is capped at ₹20 lakh under the current law

• Gratuity becomes payable within 30 days of eligibility

• Delayed payment attracts simple interest and penalties

• Gratuity may be forfeited for serious misconduct or moral turpitude

• Register under the Gratuity Act if the workforce strength crosses ten employees

• Maintain accurate service and payroll records for all employees

• Budget for future gratuity liabilities through proper financial planning

• Inform employees clearly about gratuity eligibility and calculation

• Nomination details should be collected and updated regularly

• Consider group gratuity insurance to manage long-term obligations smoothly

To claim gratuity tax exemption:

Confirm you meet the criteria, such as completing 5 years of continuous service, unless exempt due to death or disability.

Calculate the gratuity received using the formula (Last drawn salary × (15/26) × years of service).

Include the gratuity amount in your income tax return and mention the exempt portion under Section 10(10) for tax-free treatment.

Keep records of gratuity payments and supporting documents like Form 16, salary slips, or retirement documents for reference.

Government and private sector employees in India are taxed under the same income tax slabs, but the structure of salary, allowances, and retirement benefits results in notable tax differences. 

Government employees often receive specific exemptions and deductions that are either limited or unavailable in the private sector.

• Dearness Allowance (DA): Government employees receive DA, which is fully taxable, while private sector employees usually get variable pay or bonuses instead of DA.

• NPS Contributions: Government contributions to NPS can be tax-deductible up to 14% of salary, compared to the 10% limit typically applicable to private employees.

• Allowances (Section 10): Government employees may enjoy higher or more structured exemptions on allowances like children’s education, hostel, or transport allowances.

• Gratuity and Leave Encashment: Government employees often receive higher exemption limits or full tax exemption on gratuity and leave encashment at retirement, unlike stricter caps for private employees.

• Pension Benefits: Government employees are covered under OPS or NPS, which offer more predictable tax treatment. Private employees typically rely on EPF or private NPS, with different withdrawal rules.

• Under the Payment of Gratuity Act, you can claim a tax exemption on gratuity up to ₹20 lakh under Section 10(10) of the Income Tax Act.

• The taxability of gratuity depends on the employer type, years of service and applicable tax exemptions.

• Employees must complete at least 5 years of continuous service to qualify for tax-exempt gratuity, except in cases of death or disability.

Gratuity is taxable in India, but significant exemptions apply depending on the type of employment and the amount received. 

• For government employees, the entire gratuity amount is fully exempt from income tax.

• For private sector employees, gratuity is tax-exempt up to ₹20 lakh.

• Any gratuity received over ₹20 lakh is taxable as Income from Salary in the hands of the employee.

• In case the gratuity is received by the legal heir upon the employee's death, it is treated as Income from Other Sources.

The exemption limit on gratuity tax in India is ₹20 lakh for private sector employees, as per Section 10(10) of the Income Tax Act. For government employees, the entire gratuity amount is fully exempt from income tax upon retirement, resignation, or death.

Gratuity tax calculation differs for government and private sector employees in India, mainly in terms of the exemption provided and the formula for calculation.

For Government Employees

• Central, state, or local government employees receiving it on superannuation, retirement, or death can enjoy a full exemption 

• There is no cap on the tax exemption for these employees, and the entire amount is exempted

For Private Sector Employees

• The exemption for gratuity depends on whether the employee is covered under the Payment of Gratuity Act, 1972

• The lowest amount from the following is tax-exempt:

Here are the documents you need to apply for gratuity:

• Gratuity payment advice or letter from the employer

• PAN card and identity proof 

• Service certificate

• Form 16 issued by the employer

Also Read: Old vs New Tax Regime: Which One is Better for You?

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