What is the tax on gratuity received from more than one employer?

Tax on gratuity is pretty straightforward if you have worked in a single organisation your entire life. You can read all about tax on gratuity here.

Now if you change organisations multiple times and get paid gratuity multiple times, then there can be certain confusions regarding how much of it is taxed as well as the applicability of the exemption under the Income Tax Act.

Gratuity in income tax - Exemption limit
Let's simplify things first. The maximum exemption limit of Rs 10 lakh (in case of establishments not covered under Payment of Gratuity Act) and Rs 20 lakh (in case of establishments covered under Payment of Gratuity Act) are lifetime limits, i.e., these are the maximum exemption you may claim under the Income Tax Act during your lifetime.

In case of receiving gratuity for other than the first time in your life, for the purpose of computation of exemption, the limit of Rs 10 lakh and Rs 20 lakh will be reduced by the exemption amount you have claimed in the past.

Lets understand with an example
You change jobs twice in your lifetime and receive gratuity from three different employers. Your first and last employer are covered under Payment of Gratuity Act and your second employer is not. The gratuity payments received in order were Rs 6 lakh, Rs 7 lakh and Rs 12 lakh. Let's take a look at how much is taxable in each case and how much is exempt.

Assuming that you were paid as per the limits, you would be eligible for Rs 6 lakh exemption against the first gratuity payment received. At the time of receipt of second gratuity payment, you would be eligible for exemption of only Rs 4 lakh (10 lakh maximum limit less 6 lakh claimed till date).

At the time of final gratuity payment, you would be eligible for exemption of Rs 10 lakh (20 lakh maximum limit less 10 lakh claimed till date).

Taking the example further, if you were to receive any further gratuity payment in your lifetime, it would be fully taxable, since the maximum exemption limit would have been exhausted.

So if you received Rs 10 lakh as gratuity from one employer and Rs 12 lakh from another, Rs 2 lakh of the gratuity received from the second employer would be taxable as the total amount of gratuity (Rs 22 lakh) exceeds the lifetime limit of Rs 20 lakh.

Suggested watch: Where should I invest my gratuity money?

This article was originally published on December 27, 2022.