📌 Table of Contents
- What is Gratuity in salary?
- Eligibility for Gratuity
- Laws Governing Gratuity
- How is Gratuity Calculated?
- Tax Exemption on Gratuity
- Gratuity Rules for Government vs Private Employees
- Maximum Limit on Gratuity
- TDS & Tax Reporting for Gratuity
- How to Claim Gratuity?
- Gratuity Calculator Example
- Real-Life Case Study
- Tips to Maximize Gratuity Benefits
- Conclusion
- FAQs
🧾 1. What is Gratuity?
Gratuity is a lump sum monetary benefit paid by an employer to an employee as a token of gratitude for services rendered. It is paid at the time of retirement, resignation, superannuation, or in case of death or disability.
It’s a statutory retirement benefit governed by the Payment of Gratuity Act, 1972.
👥 2. Eligibility for Gratuity
To be eligible for gratuity, an employee must:
- Complete at least 5 years of continuous service with the same employer (except in case of death or disability).
- Be employed in an organization with 10 or more employees on any day in the last 12 months.
✅ Note: In case of death or disability, 5-year condition is waived.
⚖️ 3. Laws Governing Gratuity
| Aspect | Details |
|---|---|
| Governing Law | Payment of Gratuity Act, 1972 |
| Administered by | Ministry of Labour and Employment, Government of India |
| Coverage | All establishments with ≥10 employees |
| Applicable To | Both private and public sector employees |
📐 4. How is Gratuity Calculated?
The formula for gratuity calculation is different for employees covered and not covered under the Act.
✅ For employees covered under the Act:
Gratuity = (15 × Last drawn salary × No. of completed years of service) / 26
- Last drawn salary = Basic + DA
- 26 = Number of working days in a month (as per law)
✅ For employees not covered under the Act:
Gratuity = (½ × Avg. salary of last 10 months × No. of completed years)
📊 Example Calculation Table
| Particulars | Covered Under Act | Not Covered Under Act |
|---|---|---|
| Monthly Salary (Basic+DA) | ₹40,000 | ₹40,000 |
| Years of Service | 10 | 10 |
| Gratuity Formula | (15×40,000×10)/26 | ½ × 40,000 × 10 |
| Calculated Gratuity | ₹2,30,769 | ₹2,00,000 |
💸 5. Tax Exemption on Gratuity
Under Section 10(10) of the Income Tax Act:
- Government employees: Entire amount of gratuity is fully exempt.
- Non-government employees (covered under Act): Least of the following is exempt:
- ₹20,00,000 (statutory limit)
- Actual gratuity received
- Gratuity calculated using the Act’s formula
- Others (not covered under the Act): Least of:
- ₹20,00,000
- Actual amount received
- Half of average salary × completed years
🔔 Any amount exceeding the exemption is taxable under “Income from Salary”.
🏢 6. Gratuity Rules: Govt vs Private Employees
| Parameter | Government Employees | Private Sector Employees |
|---|---|---|
| Exemption Limit | Fully Exempt | Up to ₹20 Lakh |
| Act Applicability | Automatically covered | Depends on employee count |
| Calculation Method | As per govt rules | As per Gratuity Act or employer policy |
| Employer Contribution | Funded from Consolidated Fund | Employer’s liability/provision |
🔺 7. Maximum Limit on Gratuity
The maximum tax-exempt gratuity is:
- ₹20,00,000 as per the 2019 amendment
- Applies to both private and public sector employees
This limit is aggregate, i.e., across employers during an employee’s entire career.
🧾 8. TDS & Tax Reporting for Gratuity
- TDS is not deducted if the gratuity is within exempt limits.
- If it exceeds the exempt limit, TDS is deducted u/s 192.
- Shown in Form 16, and reflected in Form 26AS and AIS.
📝 9. How to Claim Gratuity?
| Step | Action |
|---|---|
| 1 | Submit Form I to employer within 30 days of leaving |
| 2 | Employer reviews and approves application |
| 3 | Gratuity amount must be paid within 30 days |
| 4 | Employer files Form L for employer record |
✅ In case of dispute, approach the Controlling Authority under Gratuity Act.
🧮 10. Gratuity Calculator Example
Let’s say:
- Salary (Basic+DA): ₹60,000
- Service period: 15 years
- Covered under Act
Gratuity = (15×60,000×15)/26 = ₹5,19,230
If the amount received is ₹5,50,000, then:
- Exempt: ₹5,19,230
- Taxable: ₹30,770
👨💼 11. Real-Life Case Study
Mr. Ravi, a private sector employee retired after 28 years of service.
- Last drawn salary: ₹1,20,000
- Received gratuity: ₹18,00,000
Exemption calculated = ₹20,00,000 cap vs actual received ₹18,00,000
✅ Entire gratuity is tax-exempt
🧾 No TDS deducted by employer
💡 12. Tips to Maximize Gratuity Benefits
- Serve for at least 5 years to qualify.
- If your employer is not covered under the Act, negotiate for gratuity benefit.
- Ensure accurate salary components (Basic+DA) for calculation.
- Maintain employment continuity if you switch between group companies.
- Retain documents like Form 16, employment proof, gratuity payment receipt.
📌 13. Conclusion
Gratuity is a crucial part of retirement planning and can offer significant tax benefits.
Whether you’re in the government or private sector, knowing how gratuity is calculated and taxed helps you make better financial decisions.
📝 Always report the gratuity correctly in your ITR and maintain related documentation.
❓ 14. FAQs
- • What is gratuity in salary?
It’s a one-time benefit paid by the employer as a token of appreciation upon retirement or resignation. - • Is gratuity taxable in India?
It is tax-free up to ₹20 lakh for non-government employees; fully exempt for government employees. - • Can an employee get gratuity before 5 years?
No, unless termination is due to death or disability. - • What if an employee dies before 5 years of service?
Gratuity is still payable to legal heirs and is fully exempt. - • Is DA included in gratuity calculation?
Yes, Basic + Dearness Allowance is used. - • How to calculate gratuity online?
You can use the Income Tax Gratuity Calculator or compute manually using the standard formula. - • Can employer refuse gratuity?
No, it’s a statutory obligation under the Gratuity Act. - • Where is gratuity shown in ITR?
Under “Salary” and “Exempt Income” sections. - • What if I change jobs frequently?
You need to complete 5 years in the same organization to claim gratuity. - • Can gratuity be attached for debts or loans?
No, gratuity cannot be attached by a court order.
Media-
