If you have received a gratuity income from your company and want to know the tax liability on it, here is how you can do it easily. Your gratuity money is an income and is therefore taxable. This is an important part of the salary structure of any employee and ultimately, goes to provide a big lump sum amount in their hands. As per Section 4(1) of the Payment of Gratuity Act 1972, an employee becomes eligible for gratuity only after completion of 5 years of continuous service with the same establishment. People who have completed at least five years of service in any company and are planning to change the organisation or are about to retire from their jobs are eligible for gratuity.
The government exempts gratuity income of Rs 20 lakhs for those employees who are covered under the Payment of Gratuity Act. For those, who are not covered, the exemption is allowed up to Rs 10 lakhs. You can calculate the tax liability on your gratuity income by using the above formula.
Gratuity = Last 10 month’s average salary (basic + DA) X number of years of employment X 1/2;
Let us assume that you have earned an average of Rs 110000 (basic +DA) in the last 10 months of your service with a particular company and you have worked for 20 years.
Gratuity received = 110000 X 20 X 1/2 = 1100000 (11 lakhs). Since income upto 10 lakhs is exempted. So your taxable income is Rs 1 lakh.
You can also go at the income tax department website (https://www.incometaxindia.gov.in/Pages/tools/Gratuity-calculator.aspx) and calculate the taxable gratuity income by following instructions.
While companies are expected to give gratuity dues to employees in a fair and just manner, it is better to know what you are entitled to so that you can flag any clerical or administrative error leading to a lesser amount.
