Gratuity Calculation And Tax Benefits

Gratuity Calculator

Gratuity is one of the retirement benefits provided by the employer to the employee in gratitude of the services rendered by the employee to the employer. As per Payment of Gratuity Act 1972, gratuity is to be given by an institution having 10 or more employees. An employee will receive gratuity

a. after superannuation
b. after resignation
c. after death (to be received by legal heirs) or
d. due to any disability accrued.

It is to be given only for the employees who have put in a minimum of five years of service except in case of death of employee wherein this 5 years cap doesn’t apply. The gratuity depends on the number of years of service rendered by the employee. If an employee has worked for a minimum of six months during a year, it will be qualified a year of service for the purpose of calculation of gratuity. For each year of service rendered, 15 days salary (for calculating 15 days salary, instead of 15/30, a factor of 15/26 is used as suggested by the Supreme Court of India) will be taken into account for the calculation purpose. The gratuity will be calculated as per the following formula:

Gratuity = (Last drawn salary * 15 * no of completed years of service)/26

Gratuity Calculator:

Use the following calculator to calculate your gratuity amount:

Tax Benefits:

Case-1: As per section 10(10)(i) of the Income Tax Act, gratuity amount received by any Central government employee or state government employee or employee of local authority is fully exempt Thumbs up

Case-2: In case of non-government employees who are covered under the Payment of Gratuity Act 1972, as per section 10(10)(ii) of the Income Tax Act, the exemption on gratuity payment received from his employer will be limited to least of the following:

1. 15 days of salary for each of the qualified years of service*
2. Rs. 20,00,000/- (hiked during September 2017  by the Government of India from earlier cap of Rs. 10 lakh)
3. Actual amount of gratuity received.

If an employee receives higher amount than the least of the above three, such difference will be added to his income under the head ‘income from salary’. In case such amount was received by legal heir due to death of the employee, any excess payment over least of the above three will be added to ‘Income from other sources’.

*For calculation of 15 days salary, as mentioned above, the factor of 15/26 will be considered.

Case-3: In case of non-government employee who is not covered under Payment of Gratuity Act 1972, the exemption on gratuity will be least of the following:

1. 15 days of salary for each of the qualified years of service**
2. Rs. 20,00,000/- (hiked during September 2017  by the Government of India from earlier cap of Rs. 10 lakh)
3. Actual amount of gratuity received.

**For calculation of 15 days salary, average salary of last 10 months immediately preceding the month of retirement is considered.

Gratuity Tax Liability Calculator:

Use the following calculator to calculate your tax liability on receipt of gratuity from your employer:

Leave a Comment

%d bloggers like this: