Is gratuity taxable on superannuation?

Is gratuity taxable on superannuation?
How is gratuity taxed
Suhel Chander - 22 March 2021

Anupam Mitra

Is gratuity taxable on superannuation?

Gratuity is considered as your retirement benefit and is tax exempted subject to certain conditions of the Income Tax Act. For the intent of taxation on gratuity, employees are divided into two categories:

  • Government employees
  • Private sector employees

When gratuity is received by an employee at the time of superannuation, the tax exemption rules for government employees differ from private ones.

In the case of the former, the entire gratuity amount received on retirement or death is exempt from income tax. In the case of private employees, they are divided as:

  • Private employees covered under the Payment of Gratuity Act of 1972.
  • Private employees not covered under the Payment of Gratuity Act of 1972.

Where private employees are covered under the Payment of Gratuity Act of 1972, any gratuity received is tax-exempt to the extent of least of the following:

1. The statutory limit of Rs 20 lakh. (maximum limit notified by the government)

2. Last drawn salary x 15/26 x No. of completed years in service

3. Actual gratuity: If the gratuity exceeds this limit, it is taxable.

For private employees not covered under the Payment of Gratuity Act of 1972, any gratuity received is tax-exempt to the extent of least of the following:

1. The statutory limit of Rs 20 lakh

2. Average salary x ½ x No. of years in service

3. Actual gratuity received

Consult a chartered accountant for queries.

Suhel Chander, Certified Financial Planner, CM Handholding Financials

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Gratuity Tax
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