How do we calculate the amount of gratuity exempted from tax?

Modified on Fri, 14 Apr, 2023 at 1:04 PM

Gratuity is a lump sum benefit given by employers to employees who have completed 5 or more years of service with the company and are retiring. The Payment of Gratuity Act, 1972 governs the calculation of gratuity, which is based on the last drawn salary and years of service. The gratuity amount is calculated as 4.81% of the basic pay. The Act applies to most firms with a workforce of 10 or more employees.


Is gratuity taxable? Yes, despite being different from the basic pay, gratuity is taxable. However, the government gives tax exemptions to gratuity amounts within a limit.


How is the amount of gratuity exempted from tax calculated?

The amount of gratuity exempted from tax = the last drawn salary x the number of years in employment x 15/26.


Last drawn salary = Basic Salary + DA (Dearness Allowance). The number of years in service is rounded off to the nearest full year.


Here is an illustration of tax exemption on gratuity:


Alex has been in employment for the past 19 years and 7 months. Their last drawn salary was Rs. 1 Lakh per month (Basic Salary + DA). Therefore, they are eligible for a gratuity payment of Rs. 11 Lakhs.


Sl. No

Particulars

Previously

As per Amendment

1

Last drawn salary (Basic + DA)

1 lakh

1 lakh


Number of years of employment

20 (will be rounded off)

20 (will be rounded off)


Gratuity

1,00,000*20*15/26 = 11,53,846

1,00,000*20*15/26 = 11,53,846

2

Maximum Exemption Allowed

10 Lakh

20 Lakh

3

Gratuity actually received

11 Lakh

11 Lakh


Amount of Exemption

10 Lakh

11 Lakh


The taxable amount of gratuity

1 lakh

 


If an organization is not covered by the gratuity act, they can only receive a maximum tax exemption of ₹10 Lakhs.

It is hoped that you found this document useful. In case of any more queries, please refer to the other articles. When necessary, please contact our product experts.

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