Income Tax | Exempt Income | Gratuity
Income Tax Exemption for Death-cum-Retirement Gratuity under Section 10(10)
Section 10(10) of the Income-tax Act, 1961 provides an exemption for eligible gratuity received on retirement, resignation, termination or death, subject to the employee category and applicable statutory limits.
What is death-cum-retirement gratuity?
Gratuity is a lump-sum employment benefit paid by an employer in recognition of service. It may be payable when an employee retires, resigns, becomes incapacitated, or dies, subject to the relevant service rules or the Payment of Gratuity Act, 1972, where applicable. Tax treatment depends on the recipient's employment category and the conditions of section 10(10).
Section 10(10): legal provisions and eligible employees
| Provision | Who is covered? | Exemption |
|---|---|---|
| Section 10(10)(i) | Specified Central or State Government employees and other persons expressly covered by the clause, receiving qualifying death-cum-retirement gratuity under the relevant pension or service rules. | The qualifying gratuity is fully exempt. |
| Section 10(10)(ii) | Employees receiving gratuity under the Payment of Gratuity Act, 1972 (or the law applicable to them under this clause). | Least of actual gratuity, the amount calculated under the statutory formula, and the notified exemption ceiling. |
| Section 10(10)(iii) | Other employees receiving gratuity on retirement, incapacitation, termination or death, as specified in the clause. | Least of actual gratuity, the prescribed salary-based calculation, and the notified exemption ceiling. |
The precise statutory language and exceptions should be checked against the Income-tax Act, 1961 and the relevant rules. Government employment does not automatically place every employee of a government-owned organization within clause (i).
How to calculate the gratuity exemption
1. Employees covered by the Payment of Gratuity Act
For a monthly-rated employee, the commonly applicable formula is 15 / 26 × last drawn wages × years of completed service, counting a part of a year exceeding six months as a completed year, subject to the Act and any special rules. For this purpose, wages generally include basic pay and dearness allowance, but not excluded allowances.
The exempt amount is the lowest of actual gratuity received, the eligible formula amount, or Rs. 20,00,000 (subject to any subsequent applicable notification or legislative change).
2. Employees not covered by the Payment of Gratuity Act
For employees falling under section 10(10)(iii), the exemption is generally the least of actual gratuity, half a month's average salary for each completed year of service, or the applicable notified ceiling. Average salary is ordinarily computed using the average of the salary for the ten months immediately preceding the month of the relevant event, with salary components determined under the applicable income-tax rules.
Unlike the Payment of Gratuity Act formula, this method generally counts completed years of service without rounding a fraction of a year upward.
Example: gratuity covered by the Payment of Gratuity Act
Suppose an employee has last drawn eligible monthly wages of Rs. 60,000, completed 20 years and 8 months of service, and received gratuity of Rs. 8,00,000. For the usual monthly-rated formula, service is counted as 21 years.
| Actual gratuity received | Rs. 8,00,000 |
|---|---|
| Formula amount: 60,000 × 15 / 26 × 21 | Rs. 7,26,923 (approximately) |
| Notified ceiling | Rs. 20,00,000 |
| Exempt gratuity (lowest amount) | Rs. 7,26,923 (approximately) |
| Taxable balance | Rs. 73,077 (approximately) |
Important conditions and practical points
- Prior gratuity exemptions: Where gratuity was received from more than one employer or in an earlier year, the applicable aggregate-ceiling and adjustment provisions must be considered.
- Death of an employee: Gratuity paid because of death may involve separate questions about the person receiving the amount and its tax character; section 10(10) and the applicable beneficiary provisions should be examined together.
- Tax regime: Qualifying exemption under section 10(10) is generally available under both the old and new tax regimes, subject to the law applicable for the relevant tax year.
- Taxable portion: Any amount exceeding the permissible exemption may be taxable under the applicable salary or other provisions, depending on the facts.
- Evidence: Preserve the employer's gratuity calculation, salary details, years-of-service record and any previous gratuity exemption details.
Official law and guidance
For authoritative and updated legal text, consult the Income-tax Act, the Income-tax Rules, 1962, the India Code repository for the Payment of Gratuity Act, 1972 and subsequent labour-law developments, and the Income Tax Department e-filing portal. The Rs. 20 lakh income-tax ceiling was notified by the Central Government with effect from 29 March 2018; always check later notifications and the applicable tax year before filing.
Frequently asked questions
Is gratuity completely tax-free?
Not for every employee. Qualifying government gratuity under section 10(10)(i) is fully exempt; other categories are limited by the statutory formula and notified ceiling.
Is the Rs. 20 lakh exemption available for each employer?
No. The applicable rules address gratuity received from multiple employers and exemptions already claimed in earlier years.
Is gratuity received on resignation eligible for exemption?
It may qualify where gratuity is payable under the governing law or service terms and the requirements of the relevant clause of section 10(10) are met.
Disclaimer: This article provides general information, not individualized tax advice. Gratuity entitlement and income-tax exemption are distinct questions. Verify the applicable law, notifications and facts for the year of receipt.