A Guide To Gratuity Exemption For Employees

Explained Gratuity in the Simplest Way!

You’re entitled to a gratuity when you retire or quit a company. In order to receive compensation, you must have worked continuously for five years. The business is not required to pay bonuses to employees who leave or retire. Employers with ten or more employees were required to pay gratuities in 1972 due to a new law. You may be taxed on a portion of your gratuity, depending on how much you received. India complies with various regulations regarding gratuity exemptions for employees.

The whole amount of gratuities received by government employees is currently tax-exempt. Following the advice of the 7th Pay Commission, the maximum amount they can receive is 20 lakhs. The purpose of this blog is to discuss the fundamentals of gratuity and identify which employees are covered and which are not.

Gratuity – what does it mean?

In return for their loyalty and dedication to the company, employees receive this form of compensation. Employees who have completed at least five years of service are entitled to gratuity payments under the Payment of Gratuity Act of 1972. Generally, gratuities are paid when an employee retires or quits. There are, however, some circumstances in which compensation may be paid.

Gratuities are extra compensations paid by employers to their employees. According to Section 10(10) of the Income Tax Act, 1961, the maximum bonus that can be deducted from taxable income is now Rs. 20 lakhs. The previous exemption amount of Rs 20 lakhs no longer applies to employees who leave their jobs due to death, retirement, resignation, or disability after March 29, 2018.

A list of the requirements for eligibility for gratuities

If an employee meets certain requirements, the company must pay the full amount. In order to qualify, you must meet the following requirements:

* If someone gets paid by an organization, they are considered employees. This advantage does not apply to apprentices.

* Under this category, the employee must have served five years uninterruptedly.

* Following the completion of the required term, it is only paid upon resignation, retirement, or death of the employee.

The benefit must also be offered by companies with more than ten employees at any given time

Policies and Guidelines for Gratuities

Remember that gratuity payments are subject to unique rules and regulations. Rules and regulations are listed below:

* An employer can refuse to pay gratuity when an employee is terminated, even if the employee is entitled to it.

* Employees must pay taxes on any excess gratuity received from their employers if they receive more in a year than they are entitled to.

* A nominee or legal heir will receive a gratuity when an employee passes away, and they will be responsible for paying the appropriate taxes.

Tax exempt for gratuities

Regulations must be followed in India for gratuity exemptions:

  1. Statutory Gratuity Payments for Employees

Gratuity payments are available to individuals who worked in any listed enterprise or educational institution with ten or more employees on any given day in the previous year. In spite of having fewer than ten employees, gratuities must still be paid.

Taxable-free Gratuity Formula Calculation

Tax exemptions include:

* Employed for 15/26 years* Previous wage (basic + DA)

* As a result of the amendment, it has been increased from Rs. 10 lakhs to Rs. 20 lakhs

* Gratuity amount paid

  1. In this case, 

Pay (Basic + DA) 

* The previous draw was for 1 lakh

A 20-year-old employee (round off) is employed.

There is a gratuity of 1,000,000 times 20 times 15 times 26 times which equals 11,53,846.

* A last drawn pay of Rs. 1 lakh (basic plus DA) has been amended.

There have been 20 years of work in total. The number will be rounded to the nearest whole number

A gratuity of 1,000,000 multiplied by 20 multiplied by 15 divided by 26 equals 11,53,846

  1. Exemption maximum

* Prior to that, 10 lakhs

* The amount has been amended to 20 lakhs.

  1. I received a gratuity 

* Prior to that, 11 lakh

* 11 lakhs as amended.

If none of the above applies, then the exemption will be the least amount.

The previous figure was 1 lakh

11 lakhs, as amended

  1. Gratuities that are taxable,

* Formerly 1 lakh, 

* Nil as amended

For clarity, let’s look at an example: Mr. X’s last pay (basic + DA) was Rs. 1 lakh. As a result of his service, he is entitled to an 11 lakh gratuity. He has been working since he was 19 and seven months old.


Counting 15/26 of the previous year’s income, every year or part of a year of service is worth 15 days of salary.

There is a rounding up of service years.

2.Act does not cover employees who don’t receive gratuities

An employer does not have to refrain from providing gratuities to its employees even if the organisation does not fall under the Payment of Gratuity Act. 

Gratuities are tax-exempt when they are calculated according to the following formula:

Tax exemptions include:

* Divided by the number of years worked, the average wage for the last ten months (basic + DA)

* Ten lakhs of rupees 

* Gratuity actually paid

To determine whether these personnel are exempt from gratuities, use the following formula:

Taking Mr A as an example, he has been working for 25 years and two months. In the last ten months, the average wage was Rs90,000. There is a gratuity of 11 lakhs due to him.

  1. Over the past ten weeks, an average income of Rs.90,000 was earned.

* Employee’s years of employment are 25 (rounding up).

* 90,000 multiplied by 25 times half equals 11,25,000

  1. It is possible to exempt up to ten lakh people.
  1. Gratuities were received in the amount of 11 lakhs.

* In other words, a minimum of 10 lakhs should be exempted

* 1 lakh in gratuity is taxable


* We consider the average wage over the past ten months. 

* The number of years of service is rounded up

3.Those who work for the government

Death-or-retirement benefits received by federal, state, or local government employees are not subject to income tax. Therefore, government employees include all university professors and instructors who work for institutions founded by state legislatures or acts of parliament.


Once you’ve learned about gratuity, you should check with your employer to see if the Gratuity Act applies to them. Compensation is commonly paid along with the final payment or shortly thereafter. In accordance with the law, employers must pay the remaining amount within 30 days. From the due date to the payment date, the employer must pay simple interest.

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