If Gratuity is received by any employee while in employment then it is fully taxable in the hands of an employee. While if gratuity is received in the case of death or retirement or resignation, then the exemption is available up to the following limits.
In the 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
· 15/26 x Salary last drawn x No. Of completed years of service or part thereof in excess of 6 months.
· 10,00,000
· Gratuity actually received
Notes:
In the 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.
Download Automated Arrears Relief Calculator U/s 89(1) with Form 10E
In case of any other employee –
An amount equal to the least of the following will be exempt from tax
· ½ x Average salary of last 10 months preceding the month of retirement x Completed year of service (fraction of a year is ignored)
· 10,00,000
· 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 different previous years the aggregate maximum amount exempt from tax on account of gratuity cannot exceed Rs. 10,00,000.
If an employee had also rendered service to any other employer, then the period of service to such former employer is also included while calculating “completed the year of service” subject to the condition that any gratuity is not received from such former employer.