Gratuity is a one-time payment made by an employer to an employee as a token of gratitude for long service. In India, the tax treatment of gratuity is highly favourable-most employees receive it completely tax-free.

Who Is Covered Under the Payment of Gratuity Act, 1972?

Employees who have completed at least 5 years of continuous service with an employer that employs 10 or more people. Government employees are separately covered under their service rules.

Tax Exemption Limit

  • For employees covered under the Gratuity Act: Exempt up to the least of: (i) Actual gratuity received, (ii) \u20b920,00,000, or (iii) 15/26 \u00d7 (Basic + DA) \u00d7 completed years of service
  • For government employees: Entire gratuity is fully tax-exempt with no upper limit
  • For employees not covered under the Gratuity Act: Exempt up to the least of: (i) Actual amount, (ii) \u20b920,00,000, or (iii) Half month\u2019s average salary for each completed year of service

Calculation Example

Basic + DA = \u20b960,000/month. Completed years = 10. Gratuity = 60,000 \u00d7 15/26 \u00d7 10 = \u20b934,61,538. Maximum exemption = \u20b920,00,000. Taxable gratuity = \u20b914,61,538.

Points to Note

  • Gratuity received on death or disablement is fully exempt regardless of amount
  • The \u20b920 lakh limit applies across all employers in a lifetime
  • If you receive gratuity from multiple employers, the combined exemption cannot exceed \u20b920 lakh

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