Gratuity Payment Confusion: How Do Limits Affect Your Final Amount?

Is the gratuity limit of Rs. 200K (100K) for the payment of gratuity or for income tax purposes?

Secondly, if according to the formula calculation the amount exceeds Rs. 200K (100K), what is the amount to be paid? If the limit takes precedence over the formula, then is the formula ineffective in practice?

Gratuity Payment and Income Tax Exemption

Whatever the amount of gratuity payable to an employee on the termination of his employment, subject to the ceiling prescribed under Section 4(3) of the Payment of Gratuity Act, 1972 (Rs. 20 lakh with effect from 29-03-2018), is completely exempt from Income Tax. Normally, every employer paying gratuity strictly according to the statutory formula would restrict it to the ceiling when it exceeds it. If he pays the actual amount out of magnanimity, the exceeding amount over Rs. 20 lakh would be taxed. A similar situation arises if there are better terms of gratuity in the contract of employment or the Rules of Gratuity of such an establishment.

Thank you, Umakanthan sir, for your answer. Here I have certain more clarifications as below:

- If an employee is eligible to get 22 lacs as per the calculation of gratuity, whether he is paid 22 lacs by the employer or only 20 lacs is paid?
- If the employee is paid 22 lacs, is tax calculated above only 2 lacs or the entire 22 lacs?

Please clarify for me.

Dear Saisri,

Whether paid as per the organization's own rule of gratuity or at the discretion of the employer, the gratuity amount exceeding the ceiling under the Act, i.e., Rs. 20 lakh, and in your case, the extra amount of Rs. 2 lakh alone is taxable.