Gratuity Taxable or Not: The Government of India has raised the gratuity limit for central government employees to ₹25 lakh, effective from January 1, 2024. Previously, the limit was ₹20 lakh. With this increase, the gratuity amount received by government employees upon retirement or death has gone up. This decision was made based on the recommendations of the Seventh Pay Commission. On May 30, 2024, the Department of Pension and Pensioners Welfare, under the Ministry of Personnel, Public Grievances, and Pensions, issued a circular announcing the new gratuity limit.

Tax on Gratuity for Government Employees

For central government employees, gratuity received upon retirement or death is completely exempt from income tax. This means that government employees will not pay tax on gratuities up to ₹25 lakh.

Gratuity Rules for Private Employees

The rules for gratuity differ for private employees. Regardless of whether they fall under the ‘Payment of Gratuity Act, 1972,’ private employees are eligible for gratuity up to ₹20 lakh tax-free. Any amount exceeding this limit is subject to tax. Unlike government employees, private employees do not enjoy the same tax-free limit.

Will the Gratuity Limit for Private Employees Increase?

Currently, the gratuity limit for private employees is set at ₹20 lakh and has not been increased. If the government decides to raise this limit, a separate notification would be required. For now, the tax exemption for gratuity for private employees remains at ₹20 lakh.

Gratuity Eligibility

To be eligible for gratuity, the employee must meet the following conditions:

  • Be a full-time employee earning wages from the company
  • Have served continuously for a minimum of five years

However, gratuity will also be provided in these cases, even if the five-year requirement is not met:

  • Resignation after completing five years of service
  • Retirement according to the company’s policy
  • Disability due to an accident or illness
  • Death of the employee, in which case the gratuity will be paid to the designated nominee or legal heir

The formula for Calculating Gratuity

The formula for calculating gratuity is as follows:
(Last salary) x (Years of service) x (15/26)

Where:

  • Salary components include basic salary, dearness allowance (DA), and commission.
  • A month is considered to have 26 working days.
  • The 15-day average is calculated based on half a month’s salary.

How to Claim Gratuity

1. Submit an Application:

The employee must submit a formal application in Form I to their employer. If the employee is unable, their nominee or legal heir can do so on their behalf.

2. Employer’s Responsibility:

The employer must verify the claim, acknowledge receipt, and calculate the gratuity amount promptly to avoid delays.

3. Payment Timeline:

As per the Payment of Gratuity Act, 1972, the employer must pay the gratuity within 30 days from the due date. If delayed, the employer must pay interest on the outstanding amount.

4. Dispute Resolution:

If there’s a dispute regarding the gratuity amount or eligibility, the employee must file an application in Form N with the governing body of the region.