At the time of retirement, every employee have desire of reward for rendering long and unblemished service to the employer and Employer do so by giving a free lump sum of cash – called Gratuity. Gratuity is simply a retirement benefit which is given as a reward for long and meritorious service. With the introduction of the Payment of Gratuity Act, 1972 it is made mandatory for all employers with more than 10 employees to pay gratuity to their employee at the time of retirement or resignation for the past services of the employee. Gratuity is a ‘Salary’ income and any amount you receive as Gratuity is added to your income for that year under the head “Income from Salary”. Gratuity is payable for 15 days per year for number of years of service you have put into the organisation and the best part is that you don’t have to contribute any portion of your salary towards this amount. But it is payable only after the completion of 5 years of continuous service in the organization. Moreover, exemption is also available under section 10(10) of the Income Tax (IT) Act, 1961. Any death cum retirement gratuity received by Government or Local Authority employees is fully exempt from tax. But for Non-Government Employees the exemption is available upto a certain amount and the exemption amount depends on whether Gratuity is covered under the Payment of Gratuity Act, 1972. Non-government employee, but are covered under the Payment of Gratuity Act, 1972. Exemption in case of non-government employees who received gratuity under Payment of gratuity Act, 1972 the minimum of the following amount is exempt from tax. a. Gratuity amount actually received. b. 15 days’ salary (based on the last drawn salary) for every completed year of service (or part thereof in excess of six months) c. Rs 10,00,000/- Other relevant point in this category: • Here, Salary means – Basic + Dearness Allowance (DA) • In calculating completed year of service, more than 6 months shall be considered as completed year. A period of 6 months or less than 6 months shall be ignored. • 15 days salary shall be calculated as below. i.e., (Basic + DA)*15/26 Non-government employee, and are not covered under the Payment of Gratuity Act, 1972 Exemption in case of non-government employees who received gratuity not covered under payment of gratuity Act, 1972 the minimum of the following amount is exempt from tax. a. Gratuity amount actually received. b. Half month’s average salary for every completed year of service. c. Rs 10,00,000/- Other relevant point in this category: • Here, Salary means – Basic + Dearness Allowance (DA) • In calculating completed year of service, part of the year whether more or less than 6 months, will be ignored. • Average salary is to be calculated on the basis of the average salary for the 10 months immediately preceding the month of retirement. Important point to be kept in mind – It is very important to know that amount of Gratuity received during the service is not exempt from tax, though you can claim relief u/s 89 and the maximum exemption limit of Rs 10,00,000/- is available for gratuity received from various employers in your entire life i.e., the limit is not for each gratuity received.