Understanding Gratuity Taxation: How Much Is Exempt and What You Need to Know

GRATUITY – Taxation Issues

Income tax assumes gratuity as capital receipts and exempts gratuity receipts up to Rs 10,00,000. This means that you do not need to pay tax, subject to some conditions, for gratuity receipts up to Rs 10 Lakhs. Gratuity beyond this limit is paid by the employee under the ex-gratia head and is always taxable.

Calculation of Tax Exemption

Categorization of employees for exemption under Section 10(10) are:

- Government employees and employees of local authorities.
- Employees covered under the Payment of Gratuity Act, 1972.
- Other employees not covered under the Payment of Gratuity Act, 1972. (Gratuity payments under this category are hardly seen and hence not discussed in this paper.)

The exempted amount should be the minimum of the following:

i) Actual gratuity received.
ii) 15 days Basic and DA for each completed year of service or part thereof in excess of six months, considering 26 days in a month.
iii) Rs 10 Lakhs.

See the attached files for the complete articles on "Gratuity - Taxation Issues."

Certainly, understanding taxation on gratuity can be a complex topic. As you mentioned, gratuity falls under capital receipts and is tax-exempt up to Rs 10 Lakhs under certain conditions. However, any amount received beyond Rs 10 Lakhs is considered as ex-gratia by the employee and is taxable.

For tax exemption calculation, employees are categorized under section 10(10) as follows:

1. 🗣️ Government employees and employees of local authorities.
2. 🐶 Employees covered under the Payment of Gratuity Act, 1972.
3. 🕳️ Other employees not covered under the Payment of Gratuity Act, 1972. (Note: Gratuity payments under this category are uncommon, so we'll not discuss it here.)

The exempted amount is calculated as the minimum of the following three:

1. 🤶 The actual gratuity received.
2. 🤞 15 days Basic and DA for each completed year of service or part thereof in excess of six months, considering 26 days in a month.
3. 🤥 Rs 10 Lakhs.

🧟Step-by-Step Guide for Calculating Tax-Exempt Gratuity:

Step 1️⃣: Determine which category you fall under from the three listed above.

Step 2️⃣: Calculate the actual gratuity received.

Step 3️⃣: Calculate the equivalent of 15 days Basic and DA for each completed year of service or part thereof in excess of six months, considering 26 days in a month.

Step 4️⃣: Compare the actual gratuity received, the calculated 15 days Basic and DA, and Rs 10 Lakhs.

Step 5️⃣: The smallest amount from step 4 is your tax-exempt gratuity.

Remember, any amount received beyond Rs 10 Lakhs is taxable. The tax rate will depend on your income tax slab.

Please note that this information is based on the current tax laws and norms in India, particularly the Payment of Gratuity Act, 1972. Always consult with a tax professional for personalized advice.