Gratuity Exemption

By | July 1, 2015

If any Gratuity is received by any employee while in employment then it is fully taxable in the hands of employee. While if gratuity is received in case of death or retirement or resignation, then exemption is available up to the following limits.

In case of Government employee – Any gratuity received by an employee of Central Government, State Government or local authority is wholly exempt from tax. This exemption is not available to employees of Statutory Corporation.

In case of employees covered by Payment of Gratuity Act –

An amount equal to the least of the following will be exempt from tax

  1. 15 days of salary for every completed month as if month comprise of 26 days (15/26) x last drawn Salary x No. Of completed years of service or part thereof in excess of 6 months.
  2. Rs. 10,00,000
  3. Gratuity actually received

Notes:

In case of seasonal establishments, 15 days is substituted by 7 days.

Salary includes basic salary and dearness allowance but does not include bonus, commission, overtime wages or any other allowance.

Part of a year exceeding six months is taken as a complete year.

In case of any other employee –

An amount equal to the least of the following will be exempt from tax

  1. ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
  2. Rs. 10,00,000
  3. Gratuity actually received

Notes:

Salary includes basic pay, dearness allowance to the extent it forms part of retirement benefits and percentage wise fixed commission on turnover.

If gratuity is received by an employee from more than one employer in the same previous year or in any earlier previous years the aggregate maximum amount exempt from tax on account of gratuity cannot exceed Rs. 10,00,000 in any case.

Let us understand more by way of example.

Mr. Amitabh working in company ABCL since 01-Dec-2009. He resigned the company on 30-Nov-2015. The last drawn basic salary was Rs. 50,000/-. There were no DA applicable to him. The company had paid Rs. 4,50,000/- as gratuity. Mr. Amitabh has never received an gratuity from any of his earlier employers.

Gratuity Exemption u/s 10(10) of the income tax act for the AY 2016-17 is lease of below;

1. 15 days of salary considering 26 days of month x last drawn salary x no. of completed year

15/26 x 50,000 x 6 years = 1,73,076/-.

2. Rs. 10,00,000/-

2. Gratuity actually received i.e. Rs. 4,50,000/-.

So the final exemption is Rs. 1,73,076/-.

2 thoughts on “Gratuity Exemption

  1. tony

    Employee of private sector,covered under Gratuity/Act , retired on 30/4/2015. gratuity received on 5/5/2015 RS1778361. lacs. less under sec 10(10)Rs 10lacs TDs deducted Rs107993.

    Now ITR for 2016/17 not filed by due date -5/8/2016 , Gratuity limit now raised by way of Notfi. in 7th pay comm 1/1/2016 = Rs 20 lacs .,But CBDT vide its Circular No : 20/2015 dated 02-12-2015 (F.No. 275/192/2015-IT(B) .

    Sir, can this NEW benefit for TDS on Salary A Y 2016-17 for 20Lacs
    be availed in the ITR to be filed , in sept 2016

    as Gross gross income Salary (gratuity+Bonus +pension )= say 1073998 + other income say 72448 therefore total taxable income = say 1127391

    If the tax on gratuity is considered to 20lacs Will Tax Dept – A/O permit or any Query be raised As there shall be tax saving + refund . Can this be now filed .or may end up in Tax liability of over Rs 55 thousand , intent to do so earlier which is making LIFE difficult , After this ITR income for F/Y16 is below 2 Lacs

    Sir, your advice
    Tony .

    Reply
  2. KOLLURU JAGAN MOHAN

    Sir,
    I am a Private Compnay Employee retiring on 17.09.2017.
    Kindly, let me know whether Private Company Employees are
    covered for availing tax exemption limit of 20 lakhs at par with
    Central Government employees or not?

    Reply

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