Income Tax on Gratuity: When an employee working for a company or government department leaves their job or retires, they receive a gratuity payment from the company. But the question arises: is this gratuity taxable?

What are the tax rules on gratuity?

According to the Income Tax Department, gratuity is taxable only if it exceeds a certain threshold. Currently, gratuity up to Rs 20 lakh is tax-free. This means that if you receive a gratuity of up to Rs 20 lakh upon leaving your job, you won’t have to pay any tax on it. If the gratuity exceeds ₹20 lakh, any amount above this threshold will be taxable. Let’s understand this with a simple example.

Suppose an employee named Ramesh receives a gratuity of Rs 2.5 million (2.5 million rupees) at his office. In this case, the gratuity up to Rs 2 million (2 million rupees) will be tax-free, but the remaining Rs 5 million (2.5 million – 2 million rupees) will be taxable. The tax rate will be determined based on his total annual income.

When will the tax be imposed?

  1. If an employee receives gratuity during his/her employment, it is fully taxable.
  2. Even if the employee is retiring or leaving the job and is receiving gratuity, the amount up to Rs 20 lakh will remain tax free.
  3. Government employees and soldiers of the Indian Army, Navy and Air Force also get this exemption.
  4. Similar rules apply to employees working in private companies.

 

How is gratuity calculated?

Gratuity is typically paid at the rate of half a month’s salary for each completed year. If an employee works for 10 years and earns Rs 30,000 per month, their gratuity will be:

15 days’ salary × 10 years = gratuity amount

Where 15 days’ salary = Rs 30,000 ÷ 2 = Rs 15,000

So total gratuity = Rs 15,000 × 10 = Rs 1,50,000 (which will be tax free as it is less than ₹ 20 lakh).

When you receive gratuity, it’s essential to correctly report it on your income tax return. This helps the tax department determine the amount of exemption you’ve received and the tax you owe. Failure to provide the correct information could result in additional penalties and tax charges.