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How to Calculate Income Tax Liability on Gratuity [Sec 10(10)]

Gratuity is a retirement benefit generally payable at the time of cessation of employment and on the basis of duration of service.

If gratuity is received during service period is fully taxable for all kinds of employees i.e. for govt. and non govt. employees.

But only non government employees have to worry about his tax liability on gratuity because gratuity received by government employees at the time of retirement or death is exempted from tax. For Non Government employees income tax act has given the benefit by giving certain exemption limits upto which gratuity received by him is not taxable but there is a maximum limit of Rs 10 lakhs upto which he can claim exemption.

  1. Government employee (central /state /local authority): Gratuity received at the time of retirement fully exempt from income tax under income tax act, 1961.
  2. Non-Government employee: Exempted upto specified limit

Covered under gratuity act,1972

Not Covered under gratuity act,1972

Least is exempt:

  1. Actual receipt
  2. Maximum limit 10,00,000 (fixed)*
  3. 15/26 × salary last drawn ×rounded years of services

Least is exempt:

  1. Actual receipt
  2. Maximum limit 10,00,000 (reduced)*
  3. 15/30× Average salary × completed years of services

 Salary means: Basic pay + D.A.

Average salary means

=(Basic pay + D.A.(if)+ % commission,of 10 months immediately preceding from the month of retirement)/10

Note:-

  • 7/26 is to be considered in place of 15/26 in case of seasonal establishment.
  • In case of piece rated employees’ average salary for last 3 months immediately preceding the date of retirement should be considered.

*If gratuity act doesn’t apply standard limit 1000000 (reduced) means reduce the standard limit by an amount of which exemption is taken in any previous year.

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6 thoughts on “How to Calculate Income Tax Liability on Gratuity [Sec 10(10)]
  • asok kumar pn says:

    Where to add exess amount received after 3, 00, 000 on ac of el encasment on retirement to calculate the tax liability for a sr citizen aged 60 yrs

    . We have to pay separate tax on thisexcess of income? Where to add this along with salary. Say salary is Rs.1, 72, 000.00 and el encashment is Rs.5, 72, 000.00 on the date of retirement. What will be the tax liability
    ?

  • Sahasrabudhe K.G. says:

    I have retired from National insuarence Company (Public Undertaking) and have received a gratuity of rs 10 Lakhs on superannuation.Pl comment on my tax liability on this 10 Lakhs
    Sahasrabudhe

    • RAJESH PRAJAPATI says:

      I am Retired and i get Rs. 9,72,000 Graguty through LICi want to know i pay income tax? if yes how to calculate tax

  • Jagadish T G says:

    What is the tax treatment for Staff welfare fund received on retirement. one of our client received Rs.3,00,000/- from private school & she is Non-Govt. Employee.

    • admin says:

      Tax Treatment for Staff Welfare Fund: Staff welfare fund will be fully taxable but in case of Any other gratuity received by employee/legal heirs on retirement, termination of services, death, etc. limited to half month’s salary for each year of completed service (subject to certain conditions) {maximum limit Rs.3,50,000}.

  • Vinayak Kale says:

    If an employee of private sector getting gratuity of Rs.25 Lacs after retirement, then what will be his tax liability. As per Act Rs. 10 Lacs will be tax free and rest amount will be taxable. Is this amount be added in the income and the tax will be caculated. Please reply.
    Thanks