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

Gratuity is a lump sum benefit given to employees who have completed 5 or more years of service with the company. It’s governed by the Payment of Gratuity Act, 1972 and is calculated based on the last drawn salary and years of service.

How Is the Exempted Gratuity Amount Calculated?

The exempted gratuity amount from tax is calculated using the following formula:

Exempted Gratuity Amount = Last Drawn Salary x Years of Employment x 15/26

For an employee covered under the Payment of Gratuity Act, the tax-exempt gratuity is calculated as the least of the following:

1. Tax-exempt gratuity = MIN (Actual Gratuity Received, 15/26 × Eligible Last Drawn Salary × Eligible Service Years, ₹20,00,000)
2. For this calculation, the eligible Last Drawn Salary generally considers Basic Salary and applicable Dearness Allowance (DA). Other components such as LTA, Special Allowance, HRA, Bonus, and other fixed allowances are not included in the standard calculation.
3. If your requirement is to consider additional wage components, such as Basic + LTA + Special Allowance + Other Fixed Allowance, as the Last Drawn Salary, you must manually calculate the eligible amount as per the applicable tax rules.
4. You can then update the manually calculated amount in the Gratuity Last Drawn Salary section during the FNF process.

This ensures that the gratuity tax-exemption calculation is aligned with the applicable compliance requirements and your expected calculation.

Gratuity Tax Exemption in Keka: How It’s Calculated