Gratuity is a lump sum amount that an employee receives from a company when he leaves after serving continuously for five years. This is also one of the many retirement benefits offered by a company to an employee. The gratuity rules and requirements in India have been enshrined under the Payment of Gratuity Act, 1972. In private/ corporate sector, or those working with an organised sector also get gratuity at the time of retirement/death or on termination of services, but this amount under certain conditions is not fully exempt from taxes. And yes, that is surprising for many.
An employee's gratuity is liable to come under tax net if the amount exceeds Rs 20 lakh. Let us know whose gratuity is fully exempt from tax and when it is taxed.
1. The gratuity is fully exempt from tax if it is received by government employees, employees of municipalities and defence forces.
2. In case of other employees, the gratuity paid as calculated under the payment of Gratuity Act, 1972 is fully exempt.
3. If the gratuity paid exceeds 15 days of salary for each completed year of service, the excess amount will become taxable in the employee’s hands.
4. According to the recent amendment of Payment of Gratuity Act, 1972, gratuity up to Rs 20 lakh is exempt from tax, but gratuity received beyond this limit is taxable.
5. Notably, the Rs 20 lakh limit is not for each incidence of gratuity, but is for all gratuities received by an employee during his lifetime.
6. If you have received gratuity in the past and claimed exemption, that amount will be reduced from the amount of gratuity eligible for exemption.
7. Prior to the Rs 20 lakh limit, if an employee had paid tax due to it being in excess of Rs 10 lakh, he can claim the exemption for the enhanced balance of Rs 10 lakh now, whenever he receives further gratuity.
8. In case of multiple gratuities even if the gratuity received presently does not exceed 15 days of salary for each completed year of service, it will become taxable if it exceeds Rs 20 lakh, including the amount claimed exempt in the past.
9. For computing gratuity exemption, an employee's salary will include dearness allowance (DA) only. No other allowances, including House Rent Allowance, Leave Travel Allowance is taken into account.
10. Notably, if your employer computes gratuity on the basis of salary which includes other allowances and even if the amount is below Rs 20 lakh, for the purpose of tax exemption only basic salary and DA will be considered.