Gratuity by HA TAX


Jun 10, 2022

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In simple terms, it means a certain amount which an employer pays to his employee in return for the services which were offered by the employee to the company. It is government-regulated under the Payment of Gratuity Act 1972. The employees who are employed in a company for more than 5 years are given this amount. In case the employee gets disabled due to disease or accident then the employee is eligible to get gratuity. 

The amount depends upon the last drawn salary and the years of service rendered.

One must meet some of the eligibility criteria to avail this. They are-

  • One must be eligible for superannuation
  • One must be retired from service
  • An individual has resigned from an organisation after serving for 5 years
  • In case the employee is dead or disabled because of an accident/ disease, then gratuity is given to the nominee.
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Calculation of Gratuity

The mathematical formula for calculation is-

gratuity = [Tenure of service completed in the company * Last drawn basic salary (along with the dearness allowance)]/ 26

Note Points

  1. The amount must not be more than Rs. 20 Lakh and more than that will be considered as Ex-Gratia.
  2. If the number of years when one has worked in the last year is more than 6 months then, the round-off figure will be taken into consideration. For example, if one has been employed for 14 years and 3 months then 14 years will be the consideration value and in the case, of 14 years and 7 months then 15 years will be taken into consideration.
  3. For employees who are not covered under the Act, then the gratuity amount for them would be calculated according to the half-month salary on every service completed year.

The formula for it will be-

gratuity Amount = (15 * Last Drawn Salary* Working Days)/ 30.

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Taxation Rule

The tax levied on the gratuity amount depends upon the type of employee.

  • A government employee is exempt from the income tax.
  • The employee who is working under the employer (covered under gratuity act) then three types of income are exempted:
      • Rs 20 lakh.
      • The actual amount of gratuity received.
      • The eligible gratuity.

Note: In an employee’s entire career life, the maximum tax-exempt amount which one can claim will not go beyond Rs. 20 Lakhs.

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