Taxability of Gratuity, Retirement Benefit and Gratuity Act – H&R Block

Taxability of Gratuity for Private Sector Employees Covered Under Gratuity Act

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Taxability of Gratuity for Private Sector Employees Covered Under Gratuity Act

Gratuity is retirement benefit paid by the employer for years of loyal and dedicated service. Gratuity received by Government employee is fully exempt from tax. Taxability of Gratuity of a Private Sector employee covered by Gratuity Act is explained in this article.

Gratuity is a gift or gratuitous payment by the employer for prolonged service offered by his employee. After introduction of the Gratuity Act in 1972, Gratuity has become legally compulsory in most of the cases.  Certain amount received as Gratuity is exempt from tax. From the 3 conditions mentioned below, the amount which is the lowest is exempt from tax.

  1. Tax exemption is calculated by multiplying 15 days of salary based on the last salary drawn with no. of years individual is in service.
    For example: If an employee works for 8 years and his 15 days of salary equates to Rs 15000, tax exemption amount will be calculated as 15000 x 8.
    For employees of seasonal nature, tax exemption is calculated by multiplying 7 days of salary based on last salary drawn with no. of years individual is in service.
  2.  Individual can claim maximum exemption of 10,00,000 in his lifetime. E.g. If the Gratuity exemption claimed in FY 2009-10 Rs. 2 lakhs, upto Rs. 8 lakhs can be claimed in the future.
  3. Actual Gratuity received at the time of retirement.

After exemption, the balance amount is taxable. Other key considerations while calculating tax exemption on Gratuity are as follows:

  1.  Salary, when calculated for tax exemption purpose, includes Dearness Allowance. But Bonus, Commission, House Rent Allowance, Overtime, Wage and any other allowances are not included or calculated as Salary.
  2. For calculating salary of a day, a month is considered to be of 26 days.

If period of service is less than 6 months it shall be ignored. It shall be taken into consideration as a year only if the service period is more than 6 months.

H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for E filing their Income Tax Returns Online.

 Visit hrblock.in for more information or to find your nearest office to find assistance to file taxes.

HRBlockIndia
HRBlockIndia
H&R Block India strives to blend tax expertise with a strong focus on continually improving the client experience to provide all its clients with an unparalleled value proposition for filing their Income Tax Online.

5 Comments

  1. KALYAN KUMAR CHAKRAVORTY says:

    I have already attained 60 years and still working in a pvt ltd company for the last 32 years.
    In case i receive payment of gratuity still in service whether i will get tax benefit or not considering the amt. is Rs. 10 lakhs or more.
    After retirement conditions are clear but if the Gratuity payment is in advance while a person is still working in a same company.
    Do you feel any problem which i may have to face regarding tax etc., under such condition let me know how.

    Please advice what should be my approach to accept such payment while i am still in service in the same company.

  2. subho says:

    can any pvt company blocked my Gratuity

  3. Sathish says:

    Hi guys,

    I have completed 18 years of service and my gratuity is coming to 16 lakhs, My company is saying that as per gratuity act I can receive only 10 lakhs. Is that correct? As per my understanding, 10 lakhs is tax exempt and remaining amount should be taxable. Pls correct my understanding and pls guide me on how to forward?

  4. Rajesh Kumar Pradhan says:

    Hii Sathish

    As per statutory norms Employer is statutorily liable to pay you 10 lakhs only as per the Payment of Gratuity Act.
    Extra 6 lakhs is not liable for employer to pay. But if employer wants he can pay 6 lakhs as ex-gratia

  5. Saif says:

    Hi Rajesh Kumar Pradhan,
    The best outstanding information you share for handling the tax free accounts of different business clients online by using different cloud accounting software to run a successful business by managing the accounts of employee .if you want to run a business successfully then you must read this kind of information which provide you the best tips for managing the business accounts of your business employees and also remember all the important taglines of this kind of information especially “customer service management ” .
    Thanks

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