We have given the introduction and the main features of gratuity in a basic article based on gratuity. Some readers had sought information about the new rules for tax exemption on gratuity. We have answered this in this article. Also included is an example of calculation of tax exemption on gratuity.
New limit of tax exemption on gratuity
Tax Exemption limit on gratuity
According to Section 10 (10) of the Income Tax Act, tax exemption is given on the gratuity received by the employees. There are different rules for tax exemption on gratuity for private employees and for government employees. In the following paragraphs, we will separately mention the rules for tax exemption on gratuity for both categories of employees.
Tax exemption on gratuity of private employees Tax exemption for private employees
According to the amendment made in the Gratuity Act in the year 2018, there will be no tax on gratuity up to Rs 20 lakhs received by private employees. In addition to this, the amount received as gratuity will be kept in taxable income. According to the income tax slab applicable to you, the tax will be calculated on it and if the tax liability becomes final, then the tax will also have to be paid. It is worth mentioning that in the year 2018, before the amendment, tax exemption was given only on gratuity up to Rs 10 lakh. Which has been doubled to 20 lakh rupees.
How much gratuity does the employee get?
How much gratuity can be paid
Before giving the example of tax exemption on gratuity, we would like to tell how much gratuity is received-
An employee gets gratuity on completion of at least 5 years of work in the same institution. For every year, it is a rule to give him 15/26 times the salary of one month salary as gratuity.
Example of tax exemption o
n gratuity Example of tax exemption on gratuity
Let’s say Rajiv Kumar left his company after working for 19 years and 10 months. At the time of leaving the job, his salary was 1 lakh rupees per month. In this case, the amount of gratuity received and the tax exemption thereon will be calculated as follows-
- Last Salary (Basic + DA): Average of last 10 months = 1 lakh
- Total number of years spent in the job = 15 years (full year is counted if more than 240 days)
- Computation of gratuity = 1,00,000 * 20 * 15/26 = 11,53,846 1,00,000 * 20 * 15/26 = 11,53,846
- Maximum exemption amount of gratuity = 20 lakhs
- Rajiv Kumar gets gratuity amounted to = 11 lakhs
- Tax exemption sum Rajiv’s gratuity = complete 11 lakhs
Tax exemption on gratuity of government employees Tax exemption for government employees
The entire gratuity received by the government employees has been exempted from tax. Actually, the salary that the central employees get at this time is determined according to the recommendations of the 7th Pay Commission. In the 7th Pay Commission, the rule of giving gratuity up to a maximum of 20 lakh rupees has been fixed. That is, the gratuity of central employees cannot exceed Rs. 20 lakhs. Thus their entire gratuity remains tax free.
Does TDS deduct on gratuity?
Is TDS deducted on gratuity paid
Under section10 (10), TDS is not deducted on gratuity to the extent of income tax exemption. That is, TDS will not be deducted if gratuity is received within 20 lakh rupees at present. TDS will be deducted on whatever additional amount exceeds Rs. 30 lakhs as gratuity. At present, the rate of TDS deduction on gratuity is 10 percent.
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