When it comes to financial planning for retirement or switching jobs, gratuity is a word every salaried person wants to understand better. Thankfully, the Indian Income Tax Act provides relief in this regard through Section 10(10), which deals with incomes not included in total income, specifically gratuity.
Let’s break this down in simple terms & help you understand how Section 10(10) benefits salaried individuals, especially when they receive a large chunk of money as part of their final settlement.
What Is Gratuity?
Gratuity is a lump-sum benefit paid by employers to employees as a gesture of appreciation for the long service rendered. It is usually payable upon retirement, resignation after five years of service, or to the legal heir in case of death.
What Does Section 10(10) Say?
Section 10(10) of the Income Tax Act deals with exemptions applicable to gratuity received by an employee. It specifies the conditions under which gratuity is tax-exempt & lays out the limits and eligibility criteria. The section classifies employees into three categories:
- Government employees
- Private sector employees covered under the Payment of Gratuity Act, 1972
- Private sector employees are not covered under the Act "
Exemption Limits Under Section 10(10)
The Finance Ministry has enhanced the gratuity exemption limit:
- The gratuity received by an individual is tax-exempt up to Rs.20 lakh, up from the previous ceiling of Rs.10 lakh.
- This applies to gratuity paid on or after March 29, 2018.
This tax relief to individuals and HUFs means more take-home retirement funds for salaried employees, especially those in the private sector. "
Incomes Not Included in Total Income – What Does That Mean?
The idea behind Section 10 is to exclude specific types of income from being taxed, either fully or partially. Section 10(10) particularly focuses on gratuity, & the clause ensures that this retirement benefit doesn’t get clubbed into your taxable income up to the permitted limit.
This allows you to optimise your salary & retirement benefits, so you keep more of what you earn.
Case-Wise Breakdown
Here’s how the gratuity exemption under section 10(10) is applied in each case:
- Government Employees
For government employees, the entire amount of gratuity is fully exempt from tax, regardless of the amount received.
- Employees Covered Under the Gratuity Act
For employees covered under the Payment of Gratuity Act, the exempt amount is the least of:
- Actual gratuity received
- Rs. 20 lakhs (as per the latest update)
- 15 days' wages × number of years of service
- Other Private Sector Employees
For employees not covered under the Act, the calculation changes slightly. The exemption is the least of:
- Actual gratuity received
- Rs. 20 lakhs
- Half a month’s average salary × number of completed years of service
This framework ensures equitable exemptions across different categories of employees.
Relation to Salary Components
While gratuity is the main focus of Section 10(10), the broader Section 10 also provides exemptions for various components of salary, like leave encashment, house rent allowance (HRA), travel allowance, etc. These are all part of ensuring incomes are not included in total income to reduce overall tax liability.
It also offers exemptions on benefits received under a life insurance policy, & some expenses incurred due to your employer’s business may qualify as non-taxable under broader provisions.
Budget 2023–2024 Update
In recent years, budget announcements have been favourable to salaried individuals, with the enhancement of gratuity limits playing a pivotal role in boosting post-retirement security.
If you received a gratuity payout before October 1, 2024, you should know that it might fall under the old exemption thresholds depending on your employer type. Be sure to verify your assessment year for the exact applicability.
Final Thoughts
Section 10(10) provides immense relief to employees, allowing them to enjoy their gratuity without being burdened by taxes. By understanding whether you're eligible & how the exemption is calculated, you can make the most of your retirement benefits & even plan your resignation or job switch accordingly.
Need help calculating your gratuity exemption or confused about your salary structure? Let Callmyca.com assist you. Book your consultation today & let the tax pros handle the math! ✅
