Gratuity Tax Calculator: Want to know tax liability on gratuity income; apply this formula

Gratuity Tax Calculator: An employee working in an organisation for five years or more is eligible for gratuity income and where there is income, there is tax liability too.

For employees who are covered under the gratuity act, gratuity income up to Rs 20 lakhs are exempted from tax. For those who are not covered, the exemption is allowed up to Rs 10 lakhs. Photo: PTI

Gratuity Tax Calculator: An employee working in an organisation for five years or more is eligible for gratuity income and where there is income, there is tax liability too. So, the earning individual must be aware that gratuity money is an income and is therefore, taxable. Want to know how much will be tax liability on the gratuity income that received. We will do the math here:

Speaking on the income tax liability involved in one's gratuity income, Jitendra Solanki said, "Gratuity is an important part of the salary structure of any employee and ultimately, goes to provide a big lump sum amount in their hands. As per Section 4(1) of the Payment of Gratuity Act 1972, an employee becomes eligible for gratuity only after completion of 5 years of continuous service with the same establishment. The government exempts gratuity income of Rs 20 lakhs for those employees who are covered under the Payment of Gratuity Act. Earlier, gratuity income up to Rs 10 lakhs was exempted from tax but the exemption was raised to Rs 20 lakhs after the amendment in the Act."

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Calculation of amount of gratuity for employees not covered under the Act
Gratuity = Last 10 month’s average salary [(basic + DA) X number of years of employment] X 1/2;

For employees who are covered under the gratuity act, gratuity income up to Rs 20 lakhs are exempted from tax. For those who are not covered, the exemption is allowed up to Rs 10 lakhs. You can calculate the tax liability on your gratuity income by using the above formula.

Let us assume that you have earned an average of Rs 1,20,000 (basic +DA) in the last 10 months of your service with a particular company and you have worked for 20 years.

Gratuity received = [120000 X 20] X 1/2 = Rs 12,00,000 (Rs 12 lakhs). Since income up to Rs 10 lakhs is exempted. So your taxable income is Rs 2 lakh.

One can also go to the income tax department website (incometaxindia.gov.in) and calculate the taxable gratuity income by following instructions.

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