Tax free gratuity has increase limit up to Rs 20 Lakh

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Gratuity is a gift in form of money given in return for service. Government has raise limit for gratuity from Rs. 10 lakhs to Rs 20 lakhs for long serving employees. Gratuity Benefit amount is like bonus and reward for your long service. This means you will get tax benefit up to Rs 20 lakhs at the time of leaving your company after completing five years or at the time of retiring. In this post let us understand about how much you will save after amendment.

What is Gratuity?

In simple terms, it is retirement benefit paid to employees who have given continuous service for at least five years. It is an amount paid to an employee based on time of his total service but an employee becomes eligible only after 5 years done from service. Gratuity is paid to an employee when you retire or you resign or death. Gratuity is given by payment of Gratuity Act 1972.

Payment of Gratuity Act is a beneficial labor law in India. The Gratuity Act in India came into effect in order to provide social benefits to employees after completion of 5 years of service. Gratuity is benefit plan and it is your retirement benefits offered by your employer. You can find Gratuity eligibility details in your CTC or Company’s offer letter.

When is Gratuity Payable as per Payment of Gratuity Act 1972?

Gratuity is paid to an employee when an employee leaves employment after completing of five years in service with an employer. This gives happy to those employees who are not covered under Central Civil Services (Pension) Rules.

  • On Retirement
  • ON resignation
  • On death or disablement due to accident or disease

Gratuity is not paid as part of your regular monthly salary but it is paid on occurrence of any of above events.

You can see How to find out fake GST bills in Market

How new rule gives benefit to retirees

As per recent government order under section 4(3) of Gratuity Act maximum gratuity can be tax exempt is Rs. 20, 00,000. It has explained it briefly by putting example below.

Income Tax Exempt calculation on Gratuity payment

  • Last Drawn Monthly Salary: 2, 00,000
  • Number of Years : 20 years 8 month
  • Gratuity actually received : 25, 00,000

It is calculated based on simple formulas as below. This formula is applicable to all employees who are covered under Payment of Gratuity Act, 1972.

For Gratuity calculations, month of work is calculated as 26 days excluding Sundays. So 15-days salary will be calculated as (monthly salary*15)/26. This number multiplies by number of years in service will be gratuity amount payable.

Gratuity = last drawn salary * 15 /26 *Number of Years.

In above gratuity calculation formula ‘last drawn salary’ means it is your Basic Salary +DA allowance.  How to treat number of months for purpose of gratuity calculation after completion of 5 years? Any service which is in excess of 6 months is taken as one year. Also, note that service period calculation is not dependent on 5 days or 6 days in a week.

For example – if you have put in 20 years and 8 months in an organization your service period will be taken to be 21 years. But if your service tenure is 20 years and 2 months then this calculate your tenure will be taken as 20 years only. Under the Act, below amount is exempt from Tax.

How much tax you can save after recent amendment?

Calculation after amendment

  • Last drawn salary x number of years x 15/26
  • Gratuity Payment 2, 00,000*15/26*21 = 2423077
  • Tax exempt amount =2000000
  • Actual Gratuity Received (round off) = 2500000
  • Exemption = 2000000
  • Gratuity Taxable = 500000
  • Tax Payable @ 30.90% = 154500
  • Tax saving = 3,09,000

Calculations before amendment

  • Last drawn salary x number of years x 15/26
  • Gratuity Payment 2, 00,000*15/26*21 = 2423077
  • Tax exempt amount = 1000000
  • Actual Gratuity Received (round off) = 2500000
  • Exemption = 1000000
  • Gratuity taxable = 1 500000
  • Tax Payable @ 30.90% = 463500
  • Tax saving = 463500

As per above before amendment that amount will be exempted from tax will have Rs.10,00,000 and remaining amount of Rs. 25,00,000- Rs. 10,00,000 = 15,00,00 will be taxable. Total tax paid by you will be 4.63 lakh. However, after amendment employee will save tax of Rs.3.09 lakh at retirement time.

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