Gratuity Calculation, Rule, Process & Formula

Gratuity is a benefit received by an employee for services rendered to an organisation. For companies covered under the Gratuity Act, this benefit is paid when an employee completes five or more years of service with the employer. An employee gets gratuity when he/she resigns, retires or is laid off. In case of death or disablement there is no minimum eligibility period.

Tax treatment of gratuity is given below :-

1. Cases where Employee covered under Gratuity Act, 1972(Non- Government Employees )

• Any Gratuity received by an employee will be exempted from tax on the following basis
  • 15 days’s Salary (7 days’s salary in case of employees of a seasonal establishment ) based on salary last drawn for each year of service (i.e 15 day’s salary *length of services)
  • Rs 10,00,000 (Rs 3,50,000 upto may 23,2010)
  • Gratuity actually received

The Least of the above three is exempt from Tax

• Other Points :-
  • What is chargeable to tax :- Gratuity in excess of aforesaid limit (Above the exemption limit ) is chargeable to tax
  • How to find out the length of the service :- If the period of service is 6 months or less than 5 months ,it shall be ignored for this purpose. Conversely,if the period of the service is more than 6 months, it shall be taken as on full years

Example is explained below :-

2. In the case of any other Employee:- In other cases gratuity received by an employee on retirement , Death, termination,resignation or on his becoming incapacitated prior to the retirement is exempt from tax on the following basis:-

• Rs 10,00,000
• Half Monthly’s average salary for each completed year of services
• Gratuity actually received

The least of above three is exempt from tax

3. Other cases of Gratuity

• When gratuity is received from two or more Employers:-
  • In case of Gratuity received by a Non- Government employee ( Employee which are not covered under payment of Gratuity Act , 1972) from two or more employer (maybe in the same year or different years)
  • Maximum amount of exemption during the lifetime of the concerned employee can not exceed the notified amount (Rs 10,00,000)
  • This provision is applicable only for Non- Government employee ( Employee which are not covered under payment of Gratuity Act , 1972)
• Gratuity received in earlier years
  • suppose an employee received Rs 3,00,000 as gratuity in year 2010 .And Again received gratuity of Rs 10,00,000 in year 2018. Now in year 2010 Employee will be eligible for maximum exemption of Rs 7lakhs (Rs 10lakhs- Rs3lakhs)
• Gratuity received while in service
  • Any employee received gratuity while he continues to remain in service
  • In this case, Tax exemption is not available because , Exemption is available on in following cases:-
    • Retirement
    • Becoming incapacitated prior to such retirement
    • termination of Employment
    • resignation
    • death
  • Gratuity received from any circumstance other than mentioned above will not be exempt from tax
• Gratuity received by family members after the death of the employee
  • If gratuity is paid after death of an employee ,then there can be following situations :-

• Situation(1) :-Gratuity becomes due on May 21,2017 at the time of retirement . It is taxable in the hands of employee even if it is received by legal heirs on June 21,2017 after his death. After claiming exemption ,the balance shall be included in the salary income of the Employee. Income tax return shall be submitted by Employee’s legal heir.
• Situation(2) :- Employee (X) dies as on June 1 while in service, Gratuity is sanctioned after his death on June 17,2017,It can not be taxed in the hand of deceased employee because it become due and is payable after the death of the employee. Also this amount will not be taxed in the hands of legal heir

Hope this article will be helpful for you!