Tax on gratuity money: Difference of taxation system for govt vs private employees - Explained

Taxation of gratuity differs for government and non-government employees, but the current ruling dispensation has amended the earlier rules to facilitate it for those who are working with the corporate sector or with non-government organisations. Notably, gratuity is a part of the salary that an employee receives from his/her employer in gratitude for the services that he offered in the company. It is a benefit plan and one of the many retirement benefits extended to employees by employers on leaving the job. 

Under the Gratuity Act, employees who have worked for at least five full years with the current employer are eligible to avail this benefit. Otherwise, those who pass away or rendered disabled due to accident or illness, they must be paid gratuity. 

As far as taxation part of the gratuity is concerned, the rules are different for government and non-government employees. The gratuity received by government employees is fully exempt from tax, but private sector employees covered under the Payment of Gratuity Act, the amount is computed according to norms specified in the Act. 

In March 2019, the labour ministry stated that the income tax exemption limit on gratuity has been doubled to Rs 20 lakh from existing Rs 10 lakh. The new norms is expected to benefit employees who were not covered by the Payment of Gratuity Act, 1972. The labour ministry statement said, "Ministry of Finance has enhanced the income tax exemption for gratuity under Section 10 (10) (iii) of the Income Tax Act, 1961 to Rs 20 lakhs." 

The Labour Minister stated that this would benefit those employees of public sector undertakings (PSUs) and other employees not covered by the Payment of Gratuity Act, 1972. Notably, Finance Minister Arun Jaitley had enhanced the exemption limit. The government notification in this regard was issued on March 29, 2018, under which the ceiling was increased from Rs 10 lakh to 20 lakh, effective March 29, 2018.

Notably, the interim budget presented on February 1, 2019, had hiked the tax-free gratuity limit from Rs 20 lakh to Rs 30 lakh. The income tax department's website has put out a taxable gratuity calculator, which can be used to access for calculating taxable gratuity. You can check it here at the link given below:  

https://www.incometaxindia.gov.in/Pages/tools/Gratuity-calculator.aspx

The gratuity payable to an employee can wholly be forfeited under the following conditions:

1. If an employee has been terminated for his or her lawless or disorderly conduct or any other act of violence on his or her part; or

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2. The service of such employee is terminated for any act which constitutes an offense involving moral turpitude, provided that such offense is committed by him or her in the course of his or her employment.