How do we calculate the amount of gratuity exempted from tax?

Gratuity is a lump sum benefit given by employers to employees who have completed 5 or more years of service with the company and are retiring. The Payment of Gratuity Act, 1972 governs the calculation of gratuity, which is based on the last drawn salary and years of service. The gratuity amount is calculated as 4.81% of the basic pay. The Act applies to most firms with a workforce of 10 or more employees.

How is the amount of gratuity exempted from tax calculated?

The amount of gratuity exempted from tax = the last drawn salary x the number of years in employment x 15/26.

Here is an illustration of tax exemption on gratuity:

Alex has been in employment for the past 19 years and 7 months. Their last drawn salary was Rs. 1 Lakh per month (Basic Salary + DA). Therefore, they are eligible for a gratuity payment of Rs. 11 Lakhs.

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Sl. No

Particulars

Previously

As per Amendment

Last drawn salary (Basic + DA)

1 lakh

Number of years of employment

20 (will be rounded off)

Gratuity

1,00,000*20*15/26 = 11,53,846

Maximum Exemption Allowed

10 Lakh

20 Lakh

Gratuity actually received

11 Lakh

Amount of Exemption

10 Lakh

11 Lakh

The taxable amount of gratuity

1 lakh

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