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How to Calculate Gratuity Exemption ?


Gratuity is received as retirement benefits by most of the employee. Gratuity can be received by the employee at the time of his retirement or by his legal heir in the event of death of the employee.

Gratuity received on Retirement – Taxable under the head “Salary

Gratuity received by the legal heir - Taxable under the head “Other Sources

In both the above situations gratuity upto a specified limit is exempt under the provisions of sec.10 (10) of the Income Tax Act, 1961.

EXEMPT AMOUNT OF GRATUITY

For the purpose of exemption of gratuity the employees are divided under three categories:

Government Employees:  The whole of gratuity received is exempt from tax, either received at the time of death or retirement.

Non- Government Employees covered under the Payment of Gratuity Act, 1972: Least of the following is exempt:

  • Gratuity amount actually received.
  • 15/26 day’s salary (based on the last drawn salary means salary at the time of retirement) for every completed year of service (or part thereof in excess of six months)
  • Maximum exemptions limit Rs 10,00,000

Gratuity received in excess of the minimum of the amounts mentioned below is included in the gross salary for the purposes of taxation.

Non- Government Employees not covered under the Payment of Gratuity Act, 1972: Least of the following is exempt:

  • Gratuity amount actually received.
  • 15/30 day’s salary for every completed year of service, taking average salary for last 10 months.
  • Maximum exemption limits Rs 10,00,000

The above points can be well understood by the help of an Example:

Mr. X, an employee of ABC Co. receives Rs. 4,25,000 as gratuity. He retires after rendering service of 28 years and 7 months. At the time of retirement his monthly salary was Rs. 18,000. Is the entire amount of gratuity exempt from tax if Gratuity Act is applicable?

Computation:

Least of the following is exempt:

  1. Gratuity amount actually received                                                       4,25,000
  2. 15/26*last drawn salary*No. of completed years of service                 3,01,154              [15/26*18000*29]
  3. Basic exemption limit                                                                          10,00,000

Hence, out of Total Gratuity received, Rs. 3,01,154 is exempt from tax and the balance of Rs. 1,23,846 is taxable as Income from Salary for the relevant year.

About: 

Alok Patnia founded Taxmantra.com, an expert in tax advisory & compliance. He is a Chartered Accountant having prior exposure with Ernst & Young & KPMG.

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