Want to understand tax on gratuity? Read this complete guide

Received or about to get gratuity? Wondering what will be your tax implications? In India, the tax on gratuity is computed as per the various provisions of the Income Tax Act, 1961.  Its taxability depends on your type of employment and the circumstances under which it's received. Confused?

In this article, let’s check out all the latest taxation rules. Also, we will learn how you can grow your gratuity amount fast with savings accounts offered by IDFC FIRST Bank. 

Latest tax rules on gratuity
 

Gratuity is a financial benefit. It is paid by your employer as a token of appreciation for your service. In India, the tax on gratuity amount is decided as per the various provisions of the Income Tax Act, 1961. First, let’s understand the two important scenarios –

Scenario I – Tax on gratuity received during service.

• If you receive gratuity while you are still employed (not upon retirement, resignation, death, or similar reasons), the entire amount will be fully taxable
• As per the Income Tax Act, 1961, the income tax on gratuity will be computed under the head “Income from Salary”

Scenario II – Tax on gratuity in case of resignation, retirement, death, etc.

This scenario covers the situation when you receive gratuity upon –

• Retirement
• Resignation
• Death
• Disablement

Now, the tax on gratuity depends on whether you are a government or private-sector employee –

*Calculated as -    

Applicability of ₹20 lakh exemption limit
 

On 8 March 2019, the Central Board of Direct Taxes (CBDT) issued Notification No. S.O. 1213 (E), which increased the maximum tax-exempt gratuity amount under Section 10(10) of the Income Tax Act from ₹10 lakh to ₹20 lakh.

However, this increased limit of ₹20 lakh applies only to employees who have received gratuity due to –

1. Retirement (leaving the workforce due to age)
2. Death
3. Resignation (leaving the workforce due to choice)
4. Disablement (loss of ability to work due to injury or illness).

Also, this new exemption limit applies to gratuity payments made for events occurring on or after 29th March 2018.

Tax on gratuity based on recipient
 

Tax on gratuity in India also differs based on the living status of employees –

Due to this variation in taxability rules, the Payment of Gratuity Act, 1972, mandates that an employee must nominate a person (nominee) to receive gratuity in case of their death. This nomination must be done after completing one year of service.

Example showing the calculation of tax on gratuity
 

A private-sector employee named Ramesh retired after working with a company for 20 years. Upon retirement, he received a gratuity of ₹15,00,000. During the service, his last drawn salary (Basic + DA) was ₹50,000.

Now, as per the applicable provisions, we can calculate the exemption amount as the least of the following –

• ₹15,00,000 (actual gratuity received)
• 15 days' salary for 20 Years –

- ₹50,000 × 20 years ×

- ₹5,76,923

• ₹20 Lakh (maximum exemption)

The lowest of the above three figures is ₹5,76,923. Hence, the taxable gratuity amount would be ₹9,23,077 [₹15,00,000 (received) − ₹5,76,923 (exempt)]. It will be taxable in Ramesh’s hand under the head “Income from salary”.

Grow your gratuity amount with savings accounts offered by IDFC FIRST Bank
 

Want to grow your gratuity amount fast? Keep it in a savings account offered by IDFC FIRST Bank. With it, you can enjoy high interest rates of up to 7.25% p.a. and monthly interest credits. This allows you to grow your funds faster. Also, you get a steady income that supports your regular expenses.

Moreover, all the savings accounts provided by IDFC FIRST Bank come with zero charges on all services. You even get free and unlimited ATM withdrawals. Open your account today!

Conclusion
 

Gratuity is a crucial financial benefit for employees and understanding tax rules on gratuity under the Income Tax Act, 1961, can help you maximise its value. To ensure your gratuity works harder for you, keep it in a savings account with IDFC FIRST Bank and become entitled to a competitive interest rate of up to 7.25% p.a. with monthly interest credits and zero charges on all services. Open your savings account today!