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Gratuity Exemption – Section 10(10)

If Gratuity is received by any employee while in employment then it is fully taxable in the hands of employee. While if gratuity is received in case of death or retirement or resignation, then exemption is available up to the following limits.

In 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

In 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.

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

Salary includes basic pay, dearness allowance to the extent it forms part of retirement benefits and percentage wise fixed commission on turnover.

Also Read: Section 43B – Gratuity is allowed as expense to employer when paid before due date.

Other Points Related to Taxation

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 period of service to such former employer is also included while calculating “completed year of service” subject to condition that any gratuity is not received from such former employer.

In case of death of the employee, it has to be paid to the nominee or the legal heir of the employee. In this case, the exemption is calculated in the same manner as above and is taxed for the receiver under the head “Income from Other Sources”.

When is Gratuity Payable as per Payment of Gratuity Act 1972

Gratuity is payable to an employee when an employee leaves employment after completing at least five years in service with an employer – so this is payable –

  • On superannuation (means an employee who attains the age of retirement is said to be in superannuation)
  • On retirement or resignation
  • On death or disablement due to accident or disease (the time limit of 5 years shall not apply in the case of death or disablement of the employee)

Gratuity is not paid as part of your regular monthly salary; it is only payable on the occurrence of any of the above events.

If the employee’s services have been terminated due to any misconduct, the employer has the right to reject payment of Gratuity to the employee.

Gratuity Applicability as per Payment of Gratuity Act 1972

Every person working in a factory, mine, oil field, port, railways, plantation, Shops & Establishments, or educational institution having 10 or more employees on any day in the preceding 12 months is entitled to Gratuity. It is applicable for only permanent employees and not for trainees/interns.

Once the Act becomes applicable to an employer – even if the number of employees goes below 10, gratuity is still applicable.

To whom Gratuity is Payable?

Gratuity is normally payable to the employee himself, however in the case of death of the employee it shall be paid to his nominee & nomination has been made to his heirs. Incase the nominee is a minor; share of the minor shall be deposited with the controlling authority who shall invest the same for benefit of the minor, until he/she attains majority.

Maximum amount payable under the Gratuity Act

Maximum gratuity payable is Rs 10 lakhs  for Government & Non Government  employees. [Section 4(3)] [Of course, employer can pay more. Employee has also right to get more if obtainable under an award or contract with employer, as made clear in section 4(5)].

Nomination facility

Each employee is required to nominate one or more member of his family, as defined in the Act, who will receive the gratuity in the event of the death of the employee by filing Form “F”.

Source: Payment of Gratuity Act 1972

Also Read

Leave travel concession
Leave salary exemption
Provident Fund

9 comments

  1. Recd Rs 16.33 Lacs as Gratuity on Retirement in Fin year 2015-16 as a PSU officer. Rs 10 Lacs exempt. Balance 6.33 Lac would be taxed @ 30.9% or average of tax rate actually paid in previous 3 years ( 19.12%)?

    Also recd 8.62 Lacs leave encashment on Retirement. Rs 3 Lac exempt. Pl tell treatment of balance 5.62 Lacs

    • Prateek Agarwal

      These amount is not taxed at any specific rate but they are added to your total income. And then taxable as per income tax slab.

    • To my (CA student) knowledge the balance beyond 300000 shall be considered as income chargeable to tax under the head salary
      For further reference w.r.t Tax treatnent of leave salary go to section 10(10aa) of income tax act.

  2. I was retired from National insurance co. (PSU) & got gratuity of Rs. 1000000 in2013-14. Due to wage revision I got Rs. 340000 more being gratuity in 2015-16 so please be informed whether this amount is exempt or taxable

    • Prateek Agarwal

      The amount of gratuity is taxable but exemption is available under this section. If amount of exemption claimed earlier is now deducted from rs. 10 lakh to calculate the maximum limit of deduction.

  3. sir in case of employee covered under gratuity act if the completed service is 10years and 6months then what no of years should be taken..?

    • Prateek Agarwal

      If the period is 10 years and 6 months then 10 years should be taken in calculation. If the period is more than 6 months than it will be rounded off to the higher multiple.

  4. I have joined the company on 14-march-2011 & resigned on 30-Nov-2015. I am about to complete 4 years & 9 months service. I would like to request your kindself to please let me know that am I eligible for Gratuity & also suggest me any judiciary cases of such kind are being done recently.

    • Rohit Agarwal

      Ramesh, I have attached a case law,Mettur Beardsell Ltd, Madras v/s Regional Labour Commissioner 1998, which is very similar with yours. As per the case law, you are eligible for Gratuity.

      PDF of Case Law

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