Gratuity tax exemptionGratuity earned by an employee, be it in a PSU or a private sector firm, will not attract any tax up to Rs 20 lakh. Finance Minister Arun Jaitley on Tuesday announced that the income tax exemption for gratuity has been enhanced to Rs 20 lakh.

Gratuity is the amount of money which an employer pays to his/her employee in return for services offered to the company. Only those employees who have been employed in the company for a minimum of five years or more are given gratuity.

Recently, the government approved an amendment to increase the maximum limit of gratuity, to be exempted from tax to Rs 20 lakh from the existing ceiling of Rs 10 lakh. Now tax-free gratuity of Rs 20 lakh to organised sector workers will now be at par with the central government employees, who enjoyed the benefit after implementation of the seventh Central Pay Commission

The increase in tax-exempt gratuity limit will immediately benefit mostly those with high salaries. For instance, a person earning Rs 1.16 lakh salary (basic plus dearness allowance) with 30 years of service can get gratuity of Rs 20 lakh. Compare that to a person who earns Rs 50,000 and has put 30 years of service, their gratuity will be Rs 8.65 lakh.

The amount of gratuity can be calculated using a formula. Gratuity = n x b x 0.57.

Here n = tenure of service completed in the company, b = last drawn basic salary + dearness allowance.

Please remember that the maximum gratuity amount that is tax exempt is applicable to a person’s entire career. This means that during your entire working life, the tax-exempted gratuity amount you claim cannot exceed Rs 20 lakh (at present) in total from one or more employers.

The employers can pay more than the Rs 20 lakh gratuity. The tax limit only prescribes the minimum limit which is exempted from tax.

Kumar Shankar Roy

Kumar Shankar Roy is contributing editor with RupeeIQ. He can be contacted on