Gratuity-Limit-of-Taxability

Tax-Free Gratuity Limit

Home » Learn » Income Tax » Tax-Free Gratuity Limit

Tax-Free Gratuity Limit

Gratuity refers to a sum of money paid to an employee at the cessation of employment. The Payment of Gratuity, Act, 1972, was brought into force to facilitate the gratuity payment to employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops and other establishments. Gratuity laws are applicable to employees who have completed a minimum term of five years of continuous service in an establishment with ten or more employees. The Government of India increased the tax-free gratuity limit from Rs.10 lakhs to Rs.20 lakhs. The increase in the tax-free limit was introduced through the Payment of Gratuity Bill, 2017. In this article, we discuss the concept of taxability of gratuity payment.

Who can Claim Gratuity?

The Payment of Gratuity, Act, 1972, has specified the following persons to be the rightful recipients of gratuity:

  • Employees who are eligible for superannuation
  • Retired employees
  • Employees, who have completed a minimum term of five years of continuous service in an establishment, which houses ten or more persons
  • An employee who becomes deceased or disabled due to illness or accident

The amount of gratuity is determined by two important aspects:

  • The number of years served in an organization
  • The basic salary received most recently

Payment of Gratuity Bill, 2017

The Government has increased the tax-free limit of gratuity received by an employee to Rs.20 lakhs. The increase in the tax-free limit for gratuity will help higher salary employees. Employees in both Government and Private sector will benefit from the tax-free gratuity limit increase. In a span of an employee’s career, the tax-free gratuity amount that is claimable as an exemption under the Income Tax Act cannot exceed Rs.20 lakhs in total, from all the employers considered collectively. Employers can pay more than the stipulated Gratuity amount and any amount paid as a gratuity by the employer over Rs.20 lakhs shall be taxable.

Maternity Leave

In addition to the increase in tax-free gratuity amount, the Payment of Gratuity Bill, 2017 has also provided powers to the Central Government for determining maternity leave. Under the new provisions, expectant mothers can enjoy a maternity leave period of 26 weeks and the period of maternity leave would be deemed to be in continuous service.

A copy of the Payment of Gratuity Bill, 2017 is reproduced below for reference:

Payment of Gratuity Bill, 2017

Other Related Guides

Taxation and Other Laws (Relaxation of Certain Pro... Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020 Due to the COVID-19 outbreak, the Finance Minister announced various relief...
Expenses Disallowed under Income Tax Expenses Disallowed under Income Tax The provisions of Income-tax Law facilitate taxpayers to deduct certain expenditures for the purpose of performi...
Professional and Technical Services-TDS Applicabil... TDS on Professional and Technical Services This article provides a summary of the applicability of TDS in relation to professional and technical serv...
Income Tax Deductions for Business Income Tax Deductions for Business The Income Tax Act levies tax on income after allowing deductions to be claimed for expenses which were incurred e...
Form 34D Form 34D - Income Tax Form of application by a resident applicant seeking advance ruling under section 245Q(1) of the Income-tax Act, 1961 in relatio...

Post by Sreeram Viswanath

IndiaFilings is India's largest online compliance services platform dedicated to helping people start and grow their business, at an affordable cost. We were started in 2014 with the mission of making it easier for Entrepreneurs to start their business. We have since helped start and operate tens of thousands of businesses by offering a range of business services. Our aim is to help the entrepreneur on the legal and regulatory requirements, and be a partner throughout the business lifecycle, offering support at every stage to ensure the business remains compliant and continually growing.