{"id":30096,"date":"2025-09-30T23:46:01","date_gmt":"2025-09-30T18:16:01","guid":{"rendered":"https:\/\/carajput.com\/blog\/?p=30096"},"modified":"2026-01-07T23:45:51","modified_gmt":"2026-01-07T18:15:51","slug":"overview-on-tax-treatment-on-gratuity-in-india","status":"publish","type":"post","link":"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/","title":{"rendered":"Overview on Tax Treatment on Gratuity in India"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_58 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Page Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69d6168a019c8\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #000000;color:#000000\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #000000;color:#000000\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69d6168a019c8\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Overview_on_Tax_Treatment_on_Gratuity_in_India\" title=\"Overview on Tax Treatment on Gratuity in India\">Overview on Tax Treatment on Gratuity in India<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#What_is_Gratuity\" title=\"What is Gratuity?\">What is Gratuity?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Tax_treatment_on_gratuity\" title=\"Tax treatment on gratuity: \">Tax treatment on gratuity: <\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#If_you_are_covered_under_the_Gratuity_Act_mostly_employees_in_companies_with_10_employees\" title=\"If you are covered under the Gratuity Act (mostly employees in companies with 10+ employees)\">If you are covered under the Gratuity Act (mostly employees in companies with 10+ employees)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#If_you_are_NOT_covered_under_the_Gratuity_Act\" title=\"If you are NOT covered under the Gratuity Act\">If you are NOT covered under the Gratuity Act<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Higher_Gratuity_Liability_Due_to_Labour_Codes_Must_be_Treated_as_Expense_ICAI\" title=\"Higher Gratuity Liability Due to Labour Codes Must be Treated as Expense: ICAI\">Higher Gratuity Liability Due to Labour Codes Must be Treated as Expense: ICAI<\/a><ul class='ez-toc-list-level-3'><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Cost_Count_Rules_That_Could_Raise_Gratuity_Liability\" title=\"Cost Count (Rules That Could Raise Gratuity Liability)\">Cost Count (Rules That Could Raise Gratuity Liability)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Accounting_Implications_Higher_Gratuity_Liability\" title=\"Accounting Implications\u00a0Higher Gratuity Liability\">Accounting Implications\u00a0Higher Gratuity Liability<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/carajput.com\/blog\/overview-on-tax-treatment-on-gratuity-in-india\/#Accounting_Practices_on_Higher_Gratuity_Liability\" title=\"Accounting Practices on\u00a0Higher Gratuity Liability\">Accounting Practices on\u00a0Higher Gratuity Liability<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2><\/h2>\n<h2><span class=\"ez-toc-section\" id=\"Overview_on_Tax_Treatment_on_Gratuity_in_India\"><\/span><span style=\"color: #000080;\"><strong>Overview on Tax Treatment on Gratuity in India<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"What_is_Gratuity\"><\/span><span style=\"color: #000080;\"><strong>What is Gratuity?<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Gratuity is a lump sum paid by an employer to an employee in recognition of long-term service, governed by the Payment of Gratuity Act, 1972. It becomes payable on retirement, resignation, death, or disablement after at least 5 years of continuous service (not needed in case of death\/disablement). Following are the Tax-Free Gratuity Limits<\/p>\n<ul>\n<li>Private Sector Employees: Up to INR 20 lakh is tax-free.<\/li>\n<li>Government Employees: Up to INR 25 lakh is tax-free.<\/li>\n<li>The INR 20 lakh exemption limit is per lifetime, not per employer. If you change jobs and get gratuity multiple times, the cumulative tax-free portion across your career cannot exceed INR 20 lakh. Any excess over the exempt limit is fully taxable. Relief under Section 89 may be available to reduce tax burden on taxable gratuity.<\/li>\n<li>Applicability of INR 20 Lakh Limit : Raised from INR 10 lakh to INR 20 lakh via CBDT Notification (effective 29 March 2018). Applies on gratuity due to retirement, resignation, death, or disablement. The INR 20 lakh is a lifetime ceiling across all employers combined. INR 20 lakh is a one-time lifetime exemption, not per employer. For Act-covered employees : service &gt; 6 months is counted as full year.For non-covered : \u00a0only completed years are considered. Section 89 relief can be claimed on taxable gratuity.<\/li>\n<li>Gratuity Eligibility come after completion Minimum 5 years of continuous service required. How ever there is Exception i.e. No minimum service required in case of death or disablement.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Tax_treatment_on_gratuity\"><\/span><span style=\"color: #000080;\"><strong>Tax treatment on gratuity: <\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>Scenario I \u2013 Gratuity received <em>during service<\/em> &#8211; Fully taxable under the head Income from Salary.<\/p>\n<p>Scenario II \u2013 Gratuity received on <em>retirement\/resignation\/death\/disablement &#8211; <\/em>Government Employees &#8211; Gratuity is 100% exempt, no upper limit.<\/p>\n<h3><span class=\"ez-toc-section\" id=\"If_you_are_covered_under_the_Gratuity_Act_mostly_employees_in_companies_with_10_employees\"><\/span><span style=\"color: #000080;\"><strong>If you are covered under the Gratuity Act (mostly employees in companies with 10+ employees)<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p>The least of the following three is exempt from tax:<\/p>\n<ol>\n<li>INR 20,00,000 (lifetime limit \u2013 raised from INR 10 lakh in March 2018).<\/li>\n<li>Actual gratuity received.<\/li>\n<li>15 days\u2019 salary \u00d7 number of years of service (salary = last drawn basic + DA; service &gt; 6 months is rounded up to the next year).<\/li>\n<\/ol>\n<p>Anything above this exemption is taxable under \u201cIncome from Salary.\u201d<\/p>\n<h3><span class=\"ez-toc-section\" id=\"If_you_are_NOT_covered_under_the_Gratuity_Act\"><\/span><span style=\"color: #000080;\"><strong>If you are NOT covered under the Gratuity Act<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"color: #000080;\"><strong>The least of the following three is exempt from tax:<\/strong><\/span><\/p>\n<ol>\n<li>INR 20,00,000 (lifetime limit).<\/li>\n<li>Actual gratuity received.<\/li>\n<li>\u00bd month\u2019s average salary \u00d7 number of years of service (salary = average of last 10 months\u2019 basic + DA; service is counted in completed years only).<\/li>\n<li>For Government Employees- Gratuity is fully exempt from tax.<\/li>\n<li>Special Case \u2013 Death of Employee : If gratuity is paid to nominee\/heir : fully exempt (not taxable as salary, not even \u201cother sources\u201d).<\/li>\n<\/ol>\n<p><span style=\"color: #000080;\"><strong>Gratuity Calculation Formulas<\/strong><\/span><\/p>\n<ul>\n<li>Covered under Gratuity Act: Gratuity=Last\u00a0Drawn\u00a0Salary\u00d71526\u00d7Years\u00a0of\u00a0Service\\text{Gratuity} = \\text{Last Drawn Salary} \\times \\frac{15}{26} \\times \\text{Years of Service}Gratuity=Last\u00a0Drawn\u00a0Salary\u00d72615\u200b\u00d7Years\u00a0of\u00a0Service<\/li>\n<li>Not Covered under Gratuity Act: Gratuity=Last\u00a0Drawn\u00a0Salary\u00d71530\u00d7Years\u00a0of\u00a0Service\\text{Gratuity} = \\text{Last Drawn Salary} \\times \\frac{15}{30} \\times \\text{Years of Service}Gratuity=Last\u00a0Drawn\u00a0Salary\u00d73015\u200b\u00d7Years\u00a0of\u00a0Service <em>(Here, 30 is considered as the number of days in a month)<\/em><\/li>\n<li>Last Drawn Salary = Basic Salary + Dearness Allowance (DA)<\/li>\n<\/ul>\n<p><span style=\"color: #000080;\"><strong>Income Tax Filing Guidance<\/strong><\/span><\/p>\n<ul>\n<li>Exempt Gratuity: Report under Schedule EI (Exempt Income) in the ITR.<\/li>\n<li>Taxable Gratuity: Report under the Salary Head. If your gratuity becomes taxable, you may claim relief under <strong>Section 89<\/strong> to reduce the tax burden.<\/li>\n<\/ul>\n<p><span style=\"color: #000080;\"><strong>Tax on Gratuity \u2013 Comparison Table under the Different Scenario<\/strong><\/span><\/p>\n<table>\n<thead>\n<tr>\n<td><strong>Category<\/strong><\/td>\n<td><strong>Tax Exemption<\/strong><\/td>\n<td><strong>Exemption Limit<\/strong><\/td>\n<td><strong>Calculation Method<\/strong><\/td>\n<td><strong>Taxable Portion<\/strong><\/td>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td><strong>Government Employees<\/strong> (Central\/State Govt., Defence, Local Authority)<\/td>\n<td><strong>Fully exempt<\/strong><\/td>\n<td>No limit<\/td>\n<td>Not applicable<\/td>\n<td>Nil<\/td>\n<\/tr>\n<tr>\n<td><strong>Private Employees \u2013 Covered under Payment of Gratuity Act, 1972<\/strong><\/td>\n<td>Least of the following:<br \/>\n1\ufe0f\u20e3 Actual gratuity received<br \/>\n2\ufe0f\u20e3 15 days\u2019 salary \u00d7 years of service (service &gt; 6 months rounded up)<br \/>\n3\ufe0f\u20e3 INR 20,00,000<\/td>\n<td>INR 20 lakh (lifetime cap across employers)<\/td>\n<td>Salary = Last drawn <strong>Basic + DA<\/strong><\/td>\n<td>Excess over exempt limit taxable as <strong>Salary Income<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Private Employees \u2013 Not covered under Gratuity Act<\/strong><\/td>\n<td>Least of the following:<br \/>\n1\ufe0f\u20e3 Actual gratuity received<br \/>\n2\ufe0f\u20e3 \u00bd month\u2019s average salary \u00d7 completed years of service<br \/>\n3\ufe0f\u20e3 INR 20,00,000<\/td>\n<td>INR 20 lakh (lifetime cap across employers)<\/td>\n<td>Salary = Average of last <strong>10 months\u2019 Basic + DA<\/strong><\/td>\n<td>Excess over exempt limit taxable as <strong>Salary Income<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>On Death of Employee (Nominee\/Heir receives gratuity)<\/strong><\/td>\n<td><strong>Fully exempt<\/strong><\/td>\n<td>No limit<\/td>\n<td>Not applicable<\/td>\n<td>Nil<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<h2><span class=\"ez-toc-section\" id=\"Higher_Gratuity_Liability_Due_to_Labour_Codes_Must_be_Treated_as_Expense_ICAI\"><\/span><span style=\"color: #000080;\">Higher Gratuity Liability Due to Labour Codes Must be Treated as Expense: ICAI<\/span><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone  wp-image-30913\" src=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784.jpeg\" alt=\"Higher Gratuity Liability Due to Labour Codes Must be Treated as Expense\" width=\"858\" height=\"636\" srcset=\"https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784.jpeg 1535w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784-300x222.jpeg 300w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784-1024x759.jpeg 1024w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784-768x569.jpeg 768w, https:\/\/carajput.com\/blog\/wp-content\/uploads\/2025\/09\/1767017694784-800x593.jpeg 800w\" sizes=\"(max-width: 858px) 100vw, 858px\" \/><\/p>\n<p>ICAI (Institute of Chartered Accountants of India) has clarified that any increase in gratuity liability due to the adoption of new labour codes must be treated as an expense in profit and loss and recognised in interim financial statements. this is matters because labor codes must<span style=\"color: #000080;\"> be Treated as expenses.<\/span><\/p>\n<div>\n<ul>\n<li>The new labour codes redefine wages and relax eligibility criteria for gratuity, which could significantly increase companies\u2019 gratuity liability.\u00a0This liability is expected to rise because:\n<ul>\n<li>Wages must be at least 50% of total remuneration.<\/li>\n<li>Gratuity eligibility now includes fixed-term employees after 1 year of service.<\/li>\n<li>Permanent employees become eligible after 5 years (earlier, only after completing five years).<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Cost_Count_Rules_That_Could_Raise_Gratuity_Liability\"><\/span><span style=\"color: #000080;\"><strong>Cost Count (Rules That Could Raise Gratuity Liability)<\/strong><\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Wages: At least 50% of total remuneration.<\/li>\n<li>Gratuity for Fixed-Term Employees: Eligible after 1 year at a company.<\/li>\n<li>Permanent Employees: Eligible after 5 years (earlier, only after completing five years).<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Accounting_Implications_Higher_Gratuity_Liability\"><\/span><span style=\"color: #000080;\"><strong>Accounting Implications\u00a0<\/strong><\/span><span style=\"color: #000080;\">Higher Gratuity Liability<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Companies must treat extra liability as past service cost.<\/li>\n<li>Need to recognise it as an expense in interim results for December quarter.<\/li>\n<\/ul>\n<h3><span class=\"ez-toc-section\" id=\"Accounting_Practices_on_Higher_Gratuity_Liability\"><\/span><span style=\"color: #000080;\"><strong>Accounting Practices on\u00a0<\/strong>Higher Gratuity Liability<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<ul>\n<li>Under Ind AS 19, gratuity is a defined benefit obligation.<\/li>\n<li>Companies must compute liability based on actuarial valuation considering revised wage definitions.<\/li>\n<li>FAQ clarifies that any extra liability due to new codes should be recognised as an expense immediately.<\/li>\n<li>Higher gratuity liability will affect profitability in the short term.<\/li>\n<li>Companies need to update actuarial assumptions and financial reporting for compliance.<\/li>\n<\/ul>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Overview on Tax Treatment on Gratuity in India What is Gratuity? Gratuity is a lump sum paid by an employer to an employee in recognition of long-term service, governed by the Payment of Gratuity Act, 1972. It becomes payable on retirement, resignation, death, or disablement after at least 5 years of continuous service (not needed &hellip;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[150],"tags":[10339],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30096"}],"collection":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/comments?post=30096"}],"version-history":[{"count":3,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30096\/revisions"}],"predecessor-version":[{"id":30099,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/posts\/30096\/revisions\/30099"}],"wp:attachment":[{"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/media?parent=30096"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/categories?post=30096"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/carajput.com\/blog\/wp-json\/wp\/v2\/tags?post=30096"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}