Understanding Taxation on Gratuity

Gratuity is a significant lump sum benefit given to employees upon leaving after five years of service. Taxation applies only if the gratuity exceeds the exemption amount set in Section 10(10) of the Income Tax Act.

Eligibility criteria include continuous service of five years and various termination events like resignation or superannuation. Government employees receive full exemption, while non-government employees have exemptions based on the Payment of Gratuity Act, 1972.

Tax treatment differs for employees under and not under the Gratuity Act, with exemptions calculated differently. For employees covered under the Act, exemption is the least of gratuity received, INR 20 lakhs, or last drawn salary multiplied by years of service.

For employees not covered, exemption is the least of gratuity received, INR 20 lakhs, or last 10 months' average salary multiplied by years of service.