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Section 3 Retirement Benefits 4

Section III: Retirement Benefits

How is gratuity taxed?

Gratuity is a retirement benefit that employers provide for their employees. The employee is entitled to receive gratuity when he completes five years of service at that company. It is however only paid on retirement or resignation.

Gratuity received on retirement or death by a Central, State or local government employee is fully exempt from tax for the employee or his family.

The tax treatment of your gratuity is different depending on whether your employer is covered by the Payment of Gratuity Act. Check with your company about its status and then proceed to calculate.

If your employer is covered by the Payment of Gratuity Act, then the least of the following three is tax-exempt.

  • 15 days salary based on the salary last drawn for every completed year of service or part thereof in excess of 6 months. For simplicity sake, this is calculated as last drawn salary x number of years in employment x 15/26.
    (where last drawn salary is Basic salary and DA and number of years in service is rounded off to the nearest full year)
  • Rs 10,00,000
  • Gratuity actually received

If your employer is not covered under the Payment of Gratuity Act, the the least of the following three is tax-exempt.

  • Half month’s salary for each completed year of service. While calculating completed years, any fraction of a year shall be ignored. For example – if you have worked in an organization for 14 years and 9 months, the number of years in employment shall be considered to be 14 years. Here salary is taken as average salary of the 10 months immediately before the month in which the person retires.
  • Rs 10,00,000
  • Gratuity actually received

Section III: Retirement Benefits

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