While it is also a retirement benefit, which an employee is eligible to get after he or she completes 5 years with the company, it is not fully tax exempt. The rules per se gratuity payment falls under the Payment of Gratuity Act, 1972. In some of the cases, the amount received as gratuity is fully exempt and in others it is not. Herein we will get to know some of the important rules in relation to gratuity taxation:
For employees of the defence forces, government organisations and municipalities, the amount received as gratuity is fully exempt.
For employees of other organizations too, if the computation for gratuity is made as per the payment of Gratuity Act, 1972 then also it is also fully exempt.
Nonetheless, if the gratuity amount exceeds 15 days of salary for every year of service, then the excess amount is also taxable in the hands of the employee. Also, as per a recent amendment notified to the Payment of Gratuity Act, 1972, gratuity up to a limit of Rs. 20 lakh is tax-exempt but any amount over this limit is taxable.
It is to be noted that Rs. 20 lakh limit is for all of the gratuity payments received by the individual during his or her course of employment with the private or other sector organizations. So, in a case when you received gratuity earlier then for further payments and tax implications, the earlier amount will be reduced to compute the total payout in relation to gratuity.
So, if in the previous case for any amount over Rs. 10 lakh if you had paid tax then now you are allowed to claim exemption on an amount over this limit.
Also, in a case of multiple gratuity payments, if the gratuity is not over 15 days of salary in case of each year of service then it will be taxable in case the amount exceeds Rs. 20 lakh in value.
And in case of gratuity computation and arriving at the exemption part only the dearness allowance is being considered. No other allowance such as HRA, LTA etc is taken into consideration. Herein only salary and DA is taken into account for tax exemption.