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Private Sector on Par with Government Sector for Tax on Gratuity

Jul 04, 2018 | 2 years ago | Read Time: 3 minutes | By iKnowledge Team

The Parliament has recently approved the amendments made in the Payment of Gratuity Bill, 2018. The features in the Bill will enable the government to increase the limit on tax-free gratuity with the help of an executive order.

According to the 7th Pay Commission, this limit has been raised to INR 20 Lakhs for government employees. Private sector employees will also benefit from this decision. With the current changes in the Bill, the cap has been increased to INR 20 Lakhs for tax-free gratuity.

What is Gratuity?

In plain terms, gratuity is the sum paid to you by an employer upon your retirement or at the end of employment. As an employee, you receive a lump sum amount at the end, after years of service. Gratuity is a reward for your dedicated service towards the betterment of a company or an organisation. You are paid gratuity at the time of retirement or upon your resignation.

Rules of Gratuity

Any employer with a workforce exceeding 10 employees, must provide gratuity to its employees. However, you must be in service for a minimum period of 5 years to receive gratuity. Similarly, to be eligible for gratuity, your service for 5 years should be without any breaks.

Although an important factor, the above rule comes with some relaxation in conditions.  If you wish to resign after 5 years, you must complete a minimum of 240 days of service. This means that if you want to attain gratuity, you must work for a total time period of 4 years and 240 days.

In organisations where the official work week consists of 5 days, the 5th year requires a minimum of 190 days of service. Therefore, in such a company, you can receive gratuity after a period of 4 years and 190 days of services, without interruptions.

Service without interruptions translates to continuous service. This excludes leaves taken due to sickness, accident, etc. Also, leaves due to strikes will not be considered as an interruption of services. Interruptions can be a break from service in the form of sabbaticals or when you take a leave without pay.

The condition of minimum 5 years of service is rendered void in case of death or permanent disability. In such an unfortunate circumstance, gratuity is paid to your nominee or your legal heir.

With current amendments, tax on gratuity is applicable only if the amount exceeds INR 20 Lakhs. Any amount below the above-mentioned sum is considered as a tax-free gratuity.

How is Gratuity Calculated?

The sum obtained as gratuity can be calculated using a simple formula.

Total Gratuity Amount= Last drawn monthly salary (INR) x Tenure of service (years) x 15/26

The following is the explanation of the above-mentioned terms:

Salary: Only the last drawn salary is taken into consideration. The total amount of the monthly salary includes basic salary, dearness allowance and commission (if applicable). In case the employee receives daily wages, a total average of 3-month is taken to calculate the wage of one day.


Remember, you must complete a minimum of 5 years of service. There is no upper limit on the tenure.


According to the terms of gratuity payment, a sum equivalent to the pay of 15 working days, is provided as gratuity for every completed year. Since there are 26 working days in a month, the figure considered while calculating gratuity is 15/26.

So, if you have worked for 10 years at an organisation and the last drawn salary was INR 1,00,000, you are entitled to receive

Total Gratuity= 1,00,000 x 10 x 15/26=

Rs. 5,76,923.08

Besides gratuity, a pension plan helps take care of your finances during your retirement years. Choose Aegon Life’s iInvest Plan to secure your financial future. These plans not only make you independent after retirement, they are also great tax saving investments. After all, you deserve all the comfort and leisure in the second innings of your life. 

Advt. no.: IA/Jun 2018/4126


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