What is Income Tax Exemption on Gratuity?

Gratuity is a single-time payment made to the employee. It is a token of appreciation for their time and effort spent with the company. Gratuity is regarded as an appreciation for hard work. It is given to employees who have stayed with the company for over 5 years. It is a gift from the employer given to employees. The best part is that there is a tax exemption on gratuity too.

Every employee wants recognition in addition to the base salary for the time and effort they put into the business. But is gratuity subject to taxation? You can learn the answer to this question by learning more about their eligibility, income limit, income taxation, and other details.

The Income Tax Act provides for tax exemption on gratuity under Section 10, Subsection 4A. Only statutory gratuity is exempt from income tax. Any other payment in place of gratuity is not exempt from tax.

Gratuity and Tax Exemption

The Income Tax Act offers a tax exemption for gratuity under Section 10, Subsection 4A. The terms “gratuity” and “gratuity” shall have the same meaning as in the Payment of Gratuity Act, 1972 (hereinafter referred to as “the 1972 Act”).

The amount of gratuity payable by an employer to an employee shall be such an amount as is paid on termination. It is subject to some conditions laid down in Sections 10(2) and (3) of the Income Tax Act. In other words, it means that if you receive more than Rs. 10 lakhs then it will be taxable. However, if you received less than Rs 10 lakh, the gratuity is not taxable. This limit was recently increased to Rs. 20 lakhs under Section 10 (10). Gratuity in income tax should be read clearly to learn various key points related to it.

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Only statutory gratuity is exempt from income tax

Gratuity is a payment made to an employee for services given to the company. Tax exemption on gratuity is an added benefit, as it is not taxable as per the IT Act of 1961. In fact, gratuity has been exempt from income tax since 1961.

The amount of gratuity that can be given in a year depends on the age at which you retire. Else, if you end your work with your employer under some conditions.

• If you retire before 5 years of ongoing service, then half of the amount would be exempt from paying taxes.
• If you retire after 5 years of ongoing service but before 10 years, then one-third of your income will be exempt from taxes.
• If you have 10 years of service, then two-thirds of the amount will be exempt from taxes.

Any other payment instead of gratuity is not exempt from tax

If you are a salaried employee, the gratuity that you receive as part of your salary is taxable. However, this does not mean that all other payments in place of gratuity are also taxable. Only those payments that have been made to employees who have retired or left their jobs are subject to tax at source (i.e., on their wages).

The following examples should help clarify. A company pays its staff an annual bonus based on performance during the financial year. This payment is exempt from income tax under Section 80C(6)(a)(ii). This means that it does not require any TDS because it falls under Section 80C(6)(a)(ii). Hence, no tax has been deducted from the salary under Section 80C(2) or deducted against his or her income by way of creditable tax under Section 11A.

If Gratuity is Taxable

It is vital to know whether the tax exemption on gratuity is applicable or not. If it is taxable, you have to pay tax on it. If it isn’t taxable, there will be no need for you to pay any taxes on it.

If you are unsure about the provisions, you can seek the assistance of a CA or CFP. Remember that if your income is less than Rs. 15 lakh per annum, it is likely that your gratuity will be exempt.

However, if your salary exceeds Rs. 15 lakh per annum, there is no need for further compliance. The provisions of the Income Tax Act will take care of all needs for tax exemption.

Conclusion

Gratuity in income tax is one of those rewards that you get for your hard work and loyalty at a company. If you have spent five years at a particular place, you deserve some recognition. A tax exemption on gratuities is a great way to recognise this. Tax exemption on gratuity is an excellent benefit one should not miss.

There are gratuity calculators available on Piramal Finance that will help you calculate your gratuity. You can also read about various other topics that will help you learn about various financial topics.