Is Gratuity Taxable? Exemption Limit Explained

The amount of gratuity you receive depends on your last drawn eligible wages and the number of years you worked with that employer.

In the event of the death or disability of an employee while in service, they may become eligible for gratuity irrespective of the number of years they have served. The amount received in such cases depends on the employee's eligible wages and the applicable gratuity rules.

Is Gratuity Taxable in India?

Gratuity becomes taxable in certain cases.

If your employer pays you gratuity while you are still in service, the amount is fully taxable. This applies to both government and private-sector employees.

If you receive gratuity at the time of retirement, it is not taxable if you are a government employee, subject to the applicable provisions. If you are a private-sector employee, the portion of gratuity that exceeds the tax-exempt amount may be taxable.

How Much Gratuity is Tax-Free?

Tax-free gratuity amounts vary for government and non-government employees.

1. For government employees, gratuity received at retirement is fully exempt from tax, subject to the applicable provisions. Gratuity received on death is also fully exempt.
2. For non-government employees, the maximum exemption limit is ₹20 lakh.

How Much Gratuity Can You Get?

The amount of gratuity you can receive depends on your last drawn salary, eligible salary components and the number of years you served with the employer.

There is no common limit on the gratuity amount for all employees.

1. For Central Government employees, the maximum limit is ₹25 lakh.
2. For non-government employees, the maximum amount considered for the tax exemption is ₹20 lakh.

The ₹20 lakh limit does not apply separately to each employer. Any gratuity amount that does not qualify for the tax exemption may be taxable.

How is Taxable Gratuity Taxed?

If you are a non-government employee, you might receive gratuity above the tax-exempt limit. The gratuity amount that does not qualify for exemption is considered as income from salary and taxed as per the applicable tax slab.

A person in a lower tax slab may pay less tax on the same amount of taxable gratuity than a person in a higher tax slab.

How is Gratuity Taxed When Received by a Nominee or Legal Heir?

Gratuity received by the nominee or eligible legal heir of a government employee on the employee's death is fully exempt from tax.

For a non-government employee, gratuity received by the employee's widow/widower, children or dependents on death can be exempt up to the applicable tax-exemption limit. Any amount that does not qualify for the exemption may be taxable.

Is Gratuity Taxed Differently for 1-Year and 5-Year Gratuity Eligibility?

Gratuity is taxed similarly whether you have completed one year (for fixed-term employees) or five years (for normal employees) of service. The service period is mainly considered for gratuity eligibility and calculation. It is not a separate factor that decides the tax rate.

However, to claim tax relief under Section 157(1) (earlier Section 89(1)) of the Income Tax Act on taxable gratuity, completing five years of service is considered.

Is Gratuity Taxable Under the New Tax Regime?

Gratuity is taxable under both the old and new tax regimes, and the tax rules for gratuity remain the same under both regimes.

The tax exemption limits have changed over time. For eligible non-government employees, the exemption limit has increased from ₹10 lakh to ₹20 lakh. This change is related to the gratuity tax rules and is not linked to the choice of tax regime.

Similarly, the maximum gratuity payable to central government employees has increased from ₹20 lakh to ₹25 lakh under the applicable government rules. The entire amount remains tax-exempt under both the old and new tax regimes.

Can You Receive More Gratuity Than the Tax-Exempt Limit?

For Central Government employees, the maximum retirement and death gratuity is ₹25 lakh, and it is entirely tax-free.

The gratuity tax exempt limit for a non-government employee is ₹20 lakh. You can receive more than ₹20 lakh as gratuity but the amount above the tax-exemption limit may be taxable.

Final Thoughts

Gratuity taxability varies for government and non-government employees, with eligible gratuity amounts being tax-free. Make sure you receive it when you resign or retire, as receiving gratuity while you are still in service can make the amount taxable as salary income. If your employer offers to pay gratuity during your service, understand the tax impact before accepting it.

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