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:
- Employee – An individual should be an employee drawing wages from an organization. An apprentice is not eligible to receive this benefit.
- Term – The employee should have put in continuous service for a minimum of 5 years.
- Resignation/superannuation – It is payable only on the resignation, superannuation, disablement due to accident or disease, or death of an employee, after completion of the requisite term.
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:
- Govt Employees
- 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.
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:
- Amount of Gratuity received
- INR 20 Lakhs
- Last salary (Basic + DA)* number of years of employment* 15/26
For Example:
- Mr A receives the following amount in the previous year:
- Gratuity received INR 7,00,000/-
- Year of service 25 years 7 months (excess of 6 months should be taken as a full year)
- Last salary INR 40,000/-
| 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 |
Note:
- 15 days’ salary based on the salary last drawn for every completed year of service or part thereof i.e. 15/26.
- The number of years in service is rounded off to the nearest full year.
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:
- Amount of Gratuity received
- INR 20 Lakhs
- 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:
- Mr. B received the following amount in the previous year:
- Gratuity received INR 9,00,000
- Year of service 20 years 7 months (excess of 6 months should not be taken as a full year)
- Average of last 10 month’s salary INR 70,000
| 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 |
FAQ
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.
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).
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.
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.
Hey @Shaggy
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Yes,
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Hey @Shaggy,
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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?
@AkashJhaveri @Laxmi_Navlani @Divya_Singhvi can you?
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.