Tax relief on Gratuity Payment

Gratuity is the payment made by an employer to an employee, paid in the event of superannuation, retirement, resignation or death. The act is applicable where 10 or more persons are employed. To be a beneficiary, one needs to be in continuous service of not less than 5 years. Some years back, the Supreme Court had adjudged that an employee serving 240 continuous days in the fifth year would be eligible for a gratuity payout, despite not technically having completed a full five years.

The gratuity amount you get is taxable. However, the tax is deducted over and above the exempt limit. In a welcome move for long-serving private employees, the Union Cabinet has doubled the approved ceiling limit for gratuity payouts from Rs.10 lakhs to Rs.20 lakhs. Thus the Exemption limit is least of the following-

1. Rs.20,00,000

2. Actual Gratuity received

3. Gratuity calculated as per the following:

The formula to calculate gratuity amount = 15/26 x last drawn salary x number of years; For calculating gratuity, last drawn salary includes basic and dearness allowances. Also, the number of years in service gets rounded off to the nearest full year.

 Assuming last drawn salary of Rs.2, 00,000 & 21 years of completed service, actual gratuity received would be Rs.24, 23,077.






Gratuity Payment Calculated & Received






Taxable Gratuity



Tax Payable



Thus gratuity received between Rs.10 lakhs & Rs.20 lakhs which was previously taxable becomes totally tax free & tax payable on gratuity received above Rs.20 lakhs also reduces substantially.

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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata.He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’ 

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