Calculation the Exemption of Gratuity From Tax

Gratuity is a payment made by the employer to an employee in appreciation of the past services rendered by the employee. The majority of the people are generally jumbled while the calculation of the exemption or taxable part of gratuity. Gratuity calculation is very simple with formulas of gratuity exemption’s calculation. We have described all formulas for calculation of the gratuity exemption step by step. You will also study the tax treatment of gratuity and important points to consider while receive the gratuity. You just require to find out in which category you fall as illustrated below.

Gratuity received by an employee on his retirement is taxable under the head “salary”. Gratuity is exempt upto a certain limit. For the calculation of exemption of gratuity under section 10(10), the employees are divided into 3 categories: -

• Government employee and employee of local authorities.
• Employee covered under the Payment of Gratuity Act, 1972
• Other employees not covered under the Payment of Gratuity Act, 1972

Exemption in the case of Government employees and employees of local authorities:

• The entire amount of death-cum-retirement received exempt from tax u/s 10(10)(i)

Exemption in the case of employees who have received gratuity under the payment of gratuity act, 1972

The minimum of the following amount is exempt from tax:

• The amount of gratuity actually received
• 15 days salary for every completed year of service or part thereof in excess of six months. However in the case of an employee who is employed in a seasonal establishment, and is not so employed throughout the year, the exemption shall be for seven days wages for each season.
• Rs. 3,50,000

Calculation of No. of Years of service rendered for calculating exemption of gratuity

• More than 6 months shall be taken as a completed year. A period of 6 months or less than 6 months shall be ignored. Suppose A has rendered service for 10 years and 7 months. The completed year will be treated as 11 year. B has rendered service for 10 years 5 months. The completed year will be 10 years for calculation of gratuity.

Meaning of Salary:

• Basic Salary plus D.A

Formula for calculation of gratuity

Gratuity = Salary on retirement x 15/26 x No. of years of service

Exemption in the case of other employees not covered under the payment of gratuity act, 1972

The minimum of the following amount is exempt from tax

• Actual amount of gratuity received
• Half month’s average salary for every completed year of service
• Rs. 3,50,000

Meaning of average salary:

• 10 months salary immediately preceding the months in which such event occurs. For example, of an employee retires on 2-1-2009, the average salary shall be taken as the aggregate of salary for the period from 1-3-2004 to 31-12-2004 divided by 10.

Meaning of Salary for calculation of gratuity in this case

• Salary plus D.A

Completed years of service:

• Only completed years to be taken
• Part of the year whether more or less than 6 months, will be ignored.
• Example: A retires after 12 years and 11 months, the period of service will be takes as 12 years only.

Gratuity

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