As per Section 17(1)(iii), gratuity is included in salary and salary is taxable as per Section 15. However, as per Section 10(10), exemption is provided to gratuity under certain circumstances.

Government Employees: As per Section 10(10)(i), any death-cum-retirement gratuity received is wholly exempt without any monetary ceiling if the same is received under:

Ø  the revised pension rules of the Central Government or

Ø  the Central Civil Services pension rules 1972 or

Ø  Similar scheme applicable to the holders of posts connected with defence or of civil posts under the Union or

Ø  To the members of all-India services or

Ø  To the members of civil services of a State or

Ø  To the holders of civil posts under a state or

Ø  To the employees of a local authority or

Ø  Any payment of retiring gratuity under the pension code or regulations applicable to the members of defence services.

Employees covered by the Payment of Gratuity Act, 1972: As per Section 10(10)(ii), any gratuity received by an employee covered under the Payment of Gratuity Act, 1972 is exempt to the least of the following amounts:

a.    15 days salary for each year of completed service or part thereof (part year in excess of 6 months rounded off to one). Salary is the last drawn salary. 15 days salary to be calculated by apportioning the last drawn monthly salary over 26 days and calculating 15 days from that average. In case of seasonal employees, it is 7 days salary.

b.    Specified monetary limit. The present monetary limit is Rs.20,00,000.

c.    Actual amount of Gratuity received.

Ø  Gratuity in excess of the specified limit is taxable. Relief under Section 89 is available.

Ø  Gratuity received while in service is taxable but relief under Section 89 can be claimed.

Gratuity received by other employees: As per Section 10(10)(iii), gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment or any gratuity received by his widow, children or dependents on his death is exempt to the least of the following:

a.    Half months’ salary for each year of completed service. Fractions are to be ignored even if they are more than 6 months. Only completed year counts.

b.    Monetary limit specified. At present it is Rs.20,00,000 (vide Notification No.16/2019 dated 8.3.2019 F No.200/8/2018/ITA-I) for employees retiring/died/incapacitated on or after 29.3.2018.

c.    Actual amount of gratuity received.

Ø  If gratuity is received from more than one employer, the aggregate amount of exempt gratuity cannot exceed the monetary limit specified.

Ø  If any gratuity was received in earlier years but not included in taxable income, the exemption to such gratuity shall not exceed the limit as specified by the least of the 3 items as above, reduced by the gratuity amount not included in taxable income in earlier years.

Ø  Gratuity in excess of specified limit is taxable as salary on due or receipt basis. Relief as per Section 89 is available.

Ø  Gratuity received while in service is taxable. Relief is available under Section 89.