How is tax on gratuity calculated under the head salary

Gratuity is a voluntary payment paid to employees by the employer in appreciation of services rendered in the past. Its taxable in the hands of employee under the head income from salaries. However, its exempted from income tax under section 10(10) of the IT act, 1961.

As per section 10(10), in following cases any death-cum-retirement gratuity received by following person is fully exempted;

  • Government employees
  • Received under the pension code regulations applicable to members of the defense service.

In the case of non-government employees, exemption is calculated based on certain factors.

Exemption when employee covered by the payment of gratuity act, 1972

If the employee is covered under the gratuity act 1972, least of following is exempted;

  • Actual gratuity received by the assessee
  • Rs 10,00,000
  • 15/26 * last drawn salary * number of years of completed service or part thereof in excess of 6 months

Balance left out after deducting exempted portion is taxable under the head income from salaries. Salary for the purpose of above exemption calculation means basic salary plus dearness allowance.

Example

Mr X an employee of ABC limited receives Rs 2,50,000 as gratuity under the payment of gratuity act, 1972. He retires after rendering service of 30 years and 3 months. His last drawn salary was Rs 6000 per month.

Computation:

ParticularsAmount in Rupees
AActual gratuity received2,50,000
BLess: Exemption Under section 10(10)
i)   Rs 2,50,000
ii)  Rs 10,00,000
iii) (15/26)*6000*30 =  Rs 1,03,846
Least of the above three is exempted(1,03,846)
CTaxable (A-B)1,46,154

Exemption in all other cases

Any gratuity received on death, termination, resignation or retirement of an individual who is not covered by the payment of gratuity act, 1972 is eligible for exemption under section 10(10) of the income tax act, 1961. As per this section least of the following is exempted;

  • Actual gratuity received by the individual
  • Rs 10,00,000
  • ½ * average salary for 10 months preceding the month of retirement * number of years of completed service

Salary for above exemption calculation means basic salary plus dearness allowance if provided in terms of employment plus commission as a percentage of turnover achieved by the employee. Basic salary shall be the average of the last 10 months salary.

Example

Mr Y an employee of XYZ limited receives Rs 2,50,000 as gratuity after rendering service of 30 years and 3 months. He is not covered by the Payment of Gratuity Act, 1972. His average monthly salary during the last 10 months of service was Rs 6,000.

Computation:-

ParticularsAmount in Rupees
AActual gratuity received2,50,000
BLess: Exemption Under section 10(10)
i)            Rs 2,50,000
ii)          Rs 10,00,000
iii)         (1/2) * 6000 * 30 = Rs 90,000
Least of the above three is exempted(90,000)
CTaxable (A-B)1,60,000

If during the previous year, you have received gratuity from more than one employer, then exemption will be restricted up to the exemption limit as discussed above.

In case assessee has claimed exemption under section 10(10) in earlier years for the amount received from previous employers, then the maximum limit of Rs 10,00,000 will be reduced by the exemption already availed and accordingly new exemption limit will be calculated.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.