Section 10(10) — Gratuity Exemption

Gratuity is a statutory retirement benefit payable to employees who have completed at least five years of continuous service, governed by the Payment of Gratuity Act, 1972. Section 10(10) of the Income Tax Act provides the tax exemption framework for gratuity receipts, creating three distinct categories based on employment type.

For government employees, the entire gratuity received is exempt from tax without any ceiling. For employees covered under the Payment of Gratuity Act, 1972 (applicable to establishments with 10 or more employees), the exemption is the least of the actual gratuity received, 15 days salary multiplied by years of service (calculated as last drawn salary divided by 26, multiplied by 15, multiplied by completed years), or the statutory ceiling.

The statutory ceiling was enhanced to Rs 20 lakh by a notification issued in March 2018, up from the earlier limit of Rs 10 lakh. For other employees not covered by the Gratuity Act, the exemption is the least of actual gratuity, half-month average salary for each completed year of service, or Rs 20 lakh.

Gratuity received on death of the employee or on becoming permanently disabled is also exempt under the section. Where gratuity is received from more than one employer in the same year or across different years, the aggregate exemption cannot exceed the overall ceiling of Rs 20 lakh.

From an employer perspective, the gratuity provision set aside annually is tax-deductible either through an approved gratuity fund under Section 36(1)(v) or on an actual payment basis. Listed companies must also disclose their gratuity liability in their financial statements as a defined benefit obligation, with actuarial valuations under Ind AS 19 (Employee Benefits).

For employees planning retirement, understanding the interplay between the tax-exempt gratuity ceiling and their projected gratuity entitlement helps in assessing the net post-tax retirement corpus available from this source.