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

Example of Gratuity Tax Exemption

Alex’s case:

• Years of Service: 19 years 7 months

• Last Drawn Salary: ₹1,00,000 per month (Basic + DA)

Using the formula, the gratuity exemption calculation is:

Gratuity Exempted from Tax = ₹1,00,000 x 20 years x 15/26 = ₹11,53,846

Gratuity Tax Exemption in Keka: How It’s Calculated

Conclusion

• Previous Rule: Alex’s taxable gratuity would have been ₹1,00,000 since the exemption limit was ₹10,00,000.

• Amended Rule: With the new limit of ₹20,00,000, Alex’s entire gratuity of ₹11,00,000 is now fully exempt from tax, leaving no taxable amount.