Gratuity Tax Exemption – Complete Guide to Limits & Rules

Key Insights 
 

1. If you have worked at an eligible company for over five years, you can receive a tax exemption on your gratuity. This benefit can help you save more for retirement.

2. The key rule for tax-free gratuity is the ₹20,00,000 exemption limit. You can claim the lowest of these three amounts as exempt: your actual gratuity, ₹20,00,000, or the amount from the official formula.

3. To claim your tax-free gratuity, submit Form I along with your service certificate and KYC documents. Then, report the exempt amount under 'Income from Salary' in your income tax return.

If you have worked for many years, you might be asking is gratuity taxable in India? The gratuity income tax exemption limit is a high one, so it can help you save on taxes as part of your retirement benefits.

The gratuity income tax exemption limit is like a financial reward for your years of service that is partly protected from taxes. 

It is the highest amount you can receive tax-free when you retire, as set by Section 10(10D) of the Income Tax Act for gratuity. This rule helps you keep more of your gratuity.

Example:

If a private employee retires after 30 years and receives a ₹22,00,000 gratuity, only ₹2,00,000 is taxable because the exemption limit is ₹20,00,000. This means ₹20,00,000 is tax-free, helping them keep more of their retirement savings.

Read More – Leave Encashment Tax Exemption

Eligibility Criteria for Gratuity Tax Exemption

Gratuity payments are not always tax-free. Learn who is eligible for the main gratuity tax exemption, which depends on your type of employment and the rules about your service.

Here is the list of the eligibility criteria for the Gratuity Tax Exemption:

• To qualify for gratuity, a person must be an employee working under a contract with the employer. Both permanent and fixed-term employees are included.
• The employee must complete at least five years of continuous service with the employer. This service is counted from the date of joining until resignation, retirement, or termination.
• Gratuity is usually paid when an employee retires, resigns, or leaves after five years of service. If the employee dies or becomes disabled because of an accident or illness, gratuity may be paid even if five years have not been completed.
• If an employee’s job ends because of death or disability before five years of service, gratuity is still paid, regardless of the minimum service rule.
• Minimum Employee Count: The Payment of Gratuity Act, 1972The Payment of Gratuity Act, 1972 applies to businesses that had ten or more employees at any time during the past 12 months.

You can see these gratuity tax exemption eligibility criteria, which help you to claim the tax benefits and rewards you have earned through your years of service.

Bonus Tip: Do you know? If an employee contributes to a fund and the employer does not make any contributions, the interest earned during the year will be taxable on the portion of the employee’s contributions that exceeds ₹5,00,000 in a financial year.

Deduction Limits Under Gratuity Tax Exemption

Learn how to make the most of your tax-free retirement benefit. Find out the main deduction limits for gratuity tax exemption and see how they affect your savings.

• The Government of India raised the maximum gratuity amount from ₹10,00,000 to ₹20,00,000 on 29 March 2018. This change took effect right away.
• These regular increases are made to keep up with changes in the economy, employers’ ability to pay, and higher employee salaries in both private companies and Public Sector Undertakings (PSUs).
• At the same time, the Ministry of Finance raised the income tax exemption limit for gratuity under Section 10(10)(iii) of the Income Tax Act, 1961, to ₹20,00,000.
• This higher tax exemption especially helps employees of PSUs and those not covered by the Payment of Gratuity Act, 1972.
• The Ministry of Labour & Employment has officially thanked the Finance Minister for putting this higher exemption limit in place.

Make a smart plan. The ₹20,00,000 gratuity tax exemption limit helps you get the most out of this important tax-free retirement benefit.

Required Documents for Gratuity Tax Exemption

You can get your gratuity without tax. Check which documents you need for a tax exemption. This will help you claim tax easily without any tension.

• Gratuity Claim Application: Usually, you need to fill out Form I for this step.
• Service Certificate: This document shows how long you worked with the organisation.
• Identity Proof: You can use a PAN card, Aadhaar card, or a similar ID.
• Address Proof: A utility bill or another valid document that shows your address will work.
• Bank Account Details: These are needed so the gratuity amount can be sent directly to your account.
• If a nominee is making the claim after the employee’s death, use Form F for nominees or Form K for legal heirs.

To receive your full, tax-free retirement benefit, make sure you fill out the right gratuity claim form and include the required KYC documents.

How to Claim Gratuity Tax Deduction in ITR?

You can save on taxes by following a few simple steps to claim your gratuity tax deduction in your ITR. This helps you keep more of your retirement savings.

Here are the steps of the claim gratuity tax deduction in ITR:
 

If you want to claim a gratuity tax deduction, declare the exempt amount under “Income from Salary” in your ITR.

Also Read – Gift Tax Exemption

Conclusion

You can learn about the gratuity income tax exemption in this blog, which helps you get the most from your retirement benefits. Make sure you qualify, keep the ₹20,00,000 limit in mind, gather your documents, and file your ITR correctly to claim your tax-free amount.

FAQs

Why do government employees get full tax exemption on gratuity, but the private sector doesn’t? Isn’t that unfair?

In India, government employees do not pay income tax on the gratuity they receive. Private-sector employees are eligible for a tax exemption on gratuity only up to ₹20,00,000, or ₹25,00,000 for Central Government employees under recent rules.

Is Gratuity taxable under the New Regime?

Yes, Gratuity is still eligible for tax exemption under the new tax regime. The rules and limits for exemption in Section 10(10) of the Income Tax Act have not changed from the previous regime.

How do you calculate the gratuity and the tax exemption amount?

How gratuity is calculated and how much of it is tax-exempt depends on whether the employer falls under the Payment of Gratuity Act, 1972, and whether the employee works in the government or private sector.

Is the gratuity amount exempt from income tax for private employees who have worked only for 6 years?

If you are a private employee and have worked for six years without a break, you can get gratuity. Part of this amount is not taxed in India.

Is the gratuity that a government employee receives at retirement subject to tax?

No, the gratuity a government employee receives at retirement is completely exempt from tax.