Let's understand if gratuity is taxable under the Income Tax Act
Gratuity is paid by an employer to an employee when they leave the organisation after providing service for a minimum of five years. It is generally a token of gratitude presented towards the employee for their services to the organisation.
Tax on gratuity
In case of a government employee, whether it be a state government employee or a central government employee, the whole of gratuity received is tax-free. However, in case of a non-government employee, a certain amount of gratuity is exempted, and is taxed above that amount.
Organisations that have had a minimum of 10 employees anytime during the previous year are generally covered under the Payment of Gratuity Act, 1972. In such cases, the least of the following is exempted from taxation.
For calculation purposes, salary should include only the basic and dearness allowance (DA) component and not anything else.
How to calculate
Let's say your last drawn salary (basic+DA) was Rs 1.5 lakh, and you've worked for 30 years and received Rs 26 lakh as gratuity. As per the formula in the third point above, the amount would come out to be Rs 25.96 lakh and the least among the three would be Rs 20 lakh. So out of the Rs 26 lakh that you received as gratuity, Rs 20 lakh would be exempted and Rs 6 lakh would be added to your taxable income.
Somehow, if your organisation is not covered under the Gratuity Act, then you get an exemption on the least of the following three amounts:
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