Payment of Gratuity and its Tax Treatment in India


Gratuity is a lump sum amount that employers pay their employees as a sign of gratitude for the services provided. It is paid as a reward for the employee’s long service rendered. Gratuity is generally paid at the time of retirement but one can also ask for it while moving jobs after a certain length of service (5 years).

In India, all matters related to gratuity are governed under the Payment of Gratuity Act, 1972. The act was passed by the Parliament on 21st August 1972 and came into force on 16th September the same year.

All central and state government departments, defense, and local governing bodies are covered under this act. Private organisations can come under its purview subject to fulfillment of certain conditions.

The key idea behind the introduction of this Act was to provide monetary benefit to employees who have provided an extended term of service to a single employee.

Applicability of Gratuity:

Organisations with a workforce of 10 employees on a single day in the preceding 12 months are liable to pay gratuity.
Once gratuity provisions are applicable to any organization, it shall remain applicable to it in future even if number of employees are less than 10.

Time of Payment of Gratuity:

An eligible employee will receive gratuity on following events:

  • Retirement;
  • Resignation;
  • Demise;
  • Disablement due to an accident or a disease;
  • VRS;
  • Termination;
  • Lay off due to retrenchment.


  • To be eligible, an employee has to render his/her services for 5 continuous years.
  • However, this condition is not taken into consideration in situations of demise or disablement of an employee.

Computation of Continuous Service:

The following rules apply to the calculation of continuous service under the Payment of Gratuity Act, 1972.

Time of Continuous Service

Types of Business Establishment

Mines & Quarries

an establishment that works for less than 6 days in a week

In case of any other establishment

Required No. of days to be considered as 1 year of continuous employment:




Required No. of days to be considered as 6 months of continuous employment:





  • In case of seasonal establishment, attendance is required for more than 75% of the days when the establishment is functional.
  • Disablement leave, earned leave and maternity leave are counted as days worked in the calculation mentioned above.

Computation of Gratuity:

  • 15 days of wages (Basic + DA) of each year of completed service is considered for calculation.
  • The wages drawn by an employee in the last month of employment shall be taken for computation of 15 days wages.
  • As per the Gratuity Act, the amount of gratuity cannot be more than Rs 20 lakh. Any excesses would be treated as ex-gratia.

Computation of Gratuity when employer is covered under the Gratuity Act:

Step 1: Determine Tenure of Service of an Employee:

  • The very first step is to determine the tenure of service of the employee for the purpose of gratuity.
  • If an employee has worked for more than 6 months during the last year of employment, then it will be considered as full year of service for the purpose of gratuity.
  • Suppose the tenure of service is 6 years 7 months, then you receive the gratuity for 7 years. If tenure of service is 6 years and 4 months than tenure of service shall be taken as 6 years only.

Step 2: Compute 15 days Wages:

  • We know that 15 days of wages (Basic + DA) of each year of completed service is considered for calculation. This 15 days of wage amount is computed based on the salary drawn by the employee in the last month of employment.
  • To compute wages of 15 days of employment, divide salary of the last month of employment with 26 and multiply the amount with 15.

15 days Salary = 15 * Salary of Last Month of Employment / 26

Step 3: Determine Gratuity Payable:

  • The amount of gratuity payable by the employer to the employee is determined by multiplying 15 days salary with number of years of service. This implies that an amount equal to 15 days of salary is allowed as gratuity for every completed year of service.
  • The formula for computation of amount of gratuity is as follows:

Amount of Gratuity = Number of Years of Service * 15 * Salary of Last Month of Employment / 26

Computation of Gratuity when employer is not covered under the Gratuity Act:

  • Where an employer is not covered under Gratuity Act, the gratuity shall be calculated as per above steps only except that number of days in a month are taken as 30 days instead of 26 days.
  • The formula would be as follows:

Amount of Gratuity = Number of Years of Service * 15 * Salary of Last Month of Employment / 30




Employer covered under Gratuity Act

Employer not covered under Gratuity Act


Last drawn monthly salary of the employee




Tenure of Service




Per Day Salary of the Employee

(A/26) =1923

(A/30) = 1667


15 Days Salary for Gratuity Computation (C * 15)




Amount of Gratuity payable to the employee (B * D)




Treatment of Gratuity under Income Tax:

  • The tax treatment of the gratuity amount depends on the type of employee who has to receive the gratuity.
  • Government Employee: The amount of gratuity received by any government employee (whether central/state/local authority) is exempt from the income tax.
  • Private Sector Employee: Where the employer is covered under the Gratuity Act, least of the following amounts shall be exempt from Income Tax:

Lease of the following amount is exempt from tax:

  1. Rs. 20 Lakhs;
  2. The actual amount of gratuity received;
  3. The eligible gratuity.

Example: A private sector employee has received Rs. 10 Lakh as gratuity from his employer. The eligible gratuity amount is Rs. 4,00,000. In this case, the lowest of the three figures is Rs 4,00,000 which is exempt from tax. Employee must pay tax on the remaining amount of Rs 6,00,000 as per income tax slab.



Warning: mkdir(): No such file or directory in /home/bge9b4q3b1qk/public_html/munimji/academic/modules/mod_lca/cache.php on line 56

Warning: file_put_contents(/home/bge9b4q3b1qk/public_html/munimji/academic/cache/mod_lca/57e55f700d1772126b4bb8d207c1e29f.xml): failed to open stream: No such file or directory in /home/bge9b4q3b1qk/public_html/munimji/academic/modules/mod_lca/cache.php on line 57


TDS on payment

TDS is the abbreviation for Tax Deducted at Source. TDS is a direct taxation mechanism which was introduced to collect taxes from the source of income itself or at the time of income payout. Under this mechanism, a person liable to make payment to any other person is required to deduct tax at source from the total amount payable and transfer the balance to the recipient of such income. The person liable to make payment is called deductor while the recipient of the income is called the deductee. The deductor would deduct TDS at the time of crediting the amount to the account of the deductee or at the time of actual payment whichever is earlier. The TDS so deducted shall reflect in Form 26AS of the deductee for the relevant financial year. The deductee can take tax credit of such TDS amount at the time of filing of Income Tax Return.


income from house property

The income earned by the assesse from a property is taxable under the head 'Income from House Property'. If an individual owns a house property, the rent received becomes taxable. This actual rent received or the notional rent is referred to as ‘annual value’ and taxable under Income Tax. However, there are several deductions allowed by the Income Tax Act, 1961 from such income from house property. Let us discuss them briefly.

Municipal Taxes:

Municipal tax is the annual amount paid to the municipal corporation of that area. Municipal taxes are to be deducted from the Gross Annual value to derive the Net annual value of the house property.
Deduction of municipal tax is allowed only if it has been borne by the owner and paid during that financial year.


Various Forms under Employees Provident Fund

EPFO is one of the world's largest Social Security Organisations in terms of clientele and the volume of financial transactions undertaken. At present it maintains 19.34 crore accounts pertaining to its members.

The Employees' Provident Fund came into existence with the promulgation of the Employees' Provident Funds Ordinance on the 15th November, 1951. It was replaced by the Employees' Provident Funds Act, 1952. The Employees' Provident Funds Bill was introduced in the Parliament as Bill Number 15 of the year 1952 as a Bill to provide for the institution of provident funds for employees in factories and other establishments. The Act is now referred as the Employees' Provident Funds &


TDS Contractor

Section 194C of the Income Tax Act, 1961 deals with the provisions related to deduction of TDS at the time of payment to contractors/sub-contractors. According to this section any person making payment to the resident contractor (or subcontractor) for carrying out any contract (including the supply of labor) is required to deduct tax on such payment.


TDS on Salary under the Income Tax Act 1961

A salary is a form of payment from an employer to an employee, which may be specified in an employment contract. Salary is a fixed amount of money or compensation paid to an employee by an employer in return for work performed. Salary is commonly paid in fixed intervals, for example, monthly payments.

Salary in common parlance means any amount paid by an employer to his employees in lieu of services rendered by them. However, the Income Tax Act, 1961 defines the term “salary” u/s 17(1) to include the following monetary as well as non-monetary payments.

Financial Management