Tax on Gratuity

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Bharti Vasvani

Income from salary
Income Tax
Last updated on September 4th, 2023

Gratuity is a lump sum amount that an employee receives from a company when he leaves after serving continuously for five years. This is also one of the many retirement benefits. Furthermore, tax can be applicable on gratuity only where its amount exceeds the Exemption Amount as calculated under Section 10(10) of the Income-tax Act.

It is calculated based on two factors: the number of years an employee completes with an organization and the last drawn salary at the organization. It is provided by the employer to the employee on completion of 5 years of service.

Eligibility Criteria to Receive Gratuity

All employees working in an oil field, factory, mine, port, railways, shops & establishments, plantation, or education institutions having 10 or more employees at any given point in time during the financial year will be eligible for gratuity.

Note: Once the act becomes applicable to an employer, even if the number of employees reduces below 10 gratuity shall still be applicable.

The employer shall pay this amount only after an individual satisfies a few basic criteria. The following are the criteria:

Note: In case of death or disablement of an employee the term limit of 5 years shall not apply.

Gratuity Exemption

Exemption u/s 10(10) is available for this benefit received at the time of retirement/separation and for that employees have been classified into 2 categories:

  1. Govt Employees
  2. Non- Govt Employees (including PSU employees)

The whole amount received by Govt employees is fully exempt u/s 10(10)(i). This extends to employees of both State and Central Government employees, employees from the defense sector, and those working in any local authority. For Non-Govt employees / other employees, the exemption amount depends on whether the employee is covered under the Payment of Gratuity Act 1972 or not.

Tax on Gratuity

To calculate the tax-exempt gratuity amount, the law divides non-government employees into two categories. Differential tax treatment is provided based on these criteria. In case this amount is received by a nominee/heir on the demise of an employee, the amount received is liable to be taxed, falling under the “Income from other sources” head.

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Employees Covered Under the Payment of Gratuity Act

This benefit received by an individual will be viewed as a part of his/her salary component, making it a taxable entity as per existing laws. If the employee is covered by the Payment of Gratuity Act 1972- Exemption is available u/s 10(10)(ii). The least of the following is exempt from tax:

  1. Amount of Gratuity received
  2. INR 20 Lakhs
  3. Last salary (Basic + DA)* number of years of employment* 15/26

For Example:

Sr. No. Particulars Amount (INR)
1 Last drawn salary (Basic + DA) 40,000
  Number of years of employment 26 (rounded off)
  Gratuity 40,000*26*15/26 = 6,00,000
2 Maximum exemption allowed 20 lakhs
3 Gratuity actually received 7 Lakhs
  Amount of exemption (least of the three) 6 Lakhs
  Taxable Gratuity 1 Lakh


Employees Not Covered Under the Payment of Gratuity Act

If the employee is not covered by the Payment of Gratuity Act 1972- Exemption is available u/s 10(10)(iii) being the least of the following:

  1. Amount of Gratuity received
  2. INR 20 Lakhs
  3. Last 10 month’s average salary (Basic + DA + Turnover Commission)* number of years of employment* 1/2

Note: To calculate the last 10 month’s average salary do not include the salary for the month of retirement.

For Example:


Sr. No. Particulars Amount (INR)
1 Average of last 10 month’s salary 70,000
  Number of years of employment 20 (not rounded off)
  Gratuity 70,000*20*1/2 = 7,00,000
2 Maximum exemption allowed 20 lakhs
3 Gratuity actually received 9 Lakhs
  Amount of exemption (least of the three) 7 Lakhs
  Taxable Gratuity 2 Lakh



Whether TDS is to be deducted by the employer on payment of Gratuity to Employees?

The employer shall deduct TDS only when this amount exceeds the exemption amount under section 10(10) of the Income-tax Act, otherwise, the employer shall not deduct any TDS.

When is the Gratuity Amount paid?

It is payable on:
– Superannuation (or) Retirement.
– Your Resignation (or) Termination.
– Death or Disablement due to accident or disease.
– Retrenchment (or) Layoff.
– VRS (Voluntary Retirement Scheme).

Will I get an interest in gratuity?

Yes, if the employer makes a delay in the payment of gratuity, you are entitled to get a simple interest for the same from the due date of the payment made.

How do I show my gratuity exemption in income tax?

The exemption varies and depends on whether you are covered under the Payment of Gratuity Act or not. The maximum limit is INR 20 lakhs. In the ITR form, firstly enter the amount as income after deducting the exempted amount under the head Income from Salaries. Secondly, the same exempted amount is to be entered in the ‘Exempt Income’ section for verification.

Got Questions? Ask Away!

  1. Hey @Shaggy

    To calculate your tax liability, please refer to Quicko’s Income Tax Calculator. Here you can enter details about your income, deductions, exemptions and your tax liability will be calculated under both, old and the new regime.

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  2. I have already went through above tool. It requires me to have good knowledge. Hence i do not feel above tool is usefull at all for people who do not want to involve themselves in these Calculations…

    I will really appreciate it if you can tell me answers to below questions

    1. How much will i get inhand
    2. What can i do to reduce tax.
  3. Hi @Shaggy,

    We recommend you check with your employer regarding your take-home salary.
    You can plan and make tax-saving investments and payments during the year to optimize your tax liability.

    Check out this video to help you understand and plan your taxes

    Hope this helps :slight_smile:

  4. Yes,
    This was helpful. Thanks

  5. I above calculator where should i enter special allowance?

  6. Hey @Shaggy,

    You can add other allowances under Income Details > Salary Income > Other Taxable Allowances in the Income Tax Calculator.

  7. How do someone calculate tax for incomes from mutual funds only (and not direct stocks)?

    There are Equity/Debt, and both have Growth/Dividend. If I have 1/2 funds of all these types, how will it be calculated?

    Is it for profits only? Or, is it for loss as well? Will tax be -ve then?

    Or is it for the sum of all, and not per individual schemes? What happens if sum is -ve?

    What are the rates? Same as regular income slabs or different?

    If I made some profit, but don’t redeem it, is it taxable?

    Also, if I do redeem it and invest it immediately in a new one, will it still be taxable?

    Is there any tax on dividend?

  8. Hi @ztvusbqpvrco

    Sales of Equity shares shall be taxable @15% if short term and @10% if long term. However, sale of debt funds shall be taxed at slab rates.

    Tax shall be on profits only. Tax shall be levied on net profits only and tax cannot be -ve.

    Unrealised profits cannot be taxed. However if you redeem it shall be taxable even if you invest the amount immediately.

    Yes dividend received shall be taxable at slab rates from FY 2020-21.

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