InvestorQ : How is gratuity taxed?
Manish Mehta made post

How is gratuity taxed?

Nisha Chandani answered.
3 years ago

Gratuity is the loyalty reward organisations give to their employees when they complete five or more years in the organisation in return of the services rendered by the employees.

Gratuity is a monetary reward paid by the company in recognition of the employee’s years of service in the company and is mandated by the Indian law, specifically the Payment of Gratuity Act, 1972.

Taxation of gratuity varies across employees based on whether the individual works in the private or public sector.

For an employee working with the government:

  • If an employee working with state/central or local authority received gratuity, then the gratuity amount is fully exempt from Income Tax.

For any other employee working in a non-governmental organisation which is covered by Payment of Gratuity Act:

  • If gratuity received by any employee whose employer is covered under the Gratuity Act, 15 days salary as per the last drawn salary of the individual is exempt from tax.

    For any other salaried individual who receives gratuity from an employer who is not covered by Payment of Gratuity Act, then the least of the following three amounts are exempt from tax:

    • Rs.10,00,000

    • Gratuity actually received by employee

    • Half month's salary for every year of service that the employee has completed with the employer