Gratuity is taxable in employees' hands subject to some Exemption and rebates. Tax on Gratuity payment is dependent on the status of the Employee. To check the taxability of Gratuity payments, employees can be divided into three categories and taxed accordingly.
As per the Income Tax Act, Section 10(10), employees have been divided in three categories.
- The employee of Central/State Government and Local bodies: Gratuity received by employees under this category is fully exempted without any limit.
- The Employee covered under Payment of Gratuity Act: Amount received as per Gratuity Act is fully exempted.
- Other employees: For other remaining employees Limit is defined under the Income Tax Act, which was 10 lakh for the employees who retired before 29.03.2018, however, increased to 20 Lakh for employees who retired on or after 29.03.2018. In this category mostly PSU employees are covered.
However, as per rules many Employees covered under category 3 are getting gratuity up to 20 Lkah wef 01.01.2016. Means, gratuity received by employees retired in between 01.01.2016 to 28.03.2018 in excess of 10 lakh will be taxable.
The good news is here that category 3 employees (retired from 01.01.16 to 28.03.18) and received gratuity in excess of 10 lakh may claim relief under section 89(1) of the Income Tax act.
But a Few people know that relief u/s 89(1) is also available on the Balance amount of taxable gratuity. We have prepared a calculator to calculate Tax relief u/s 89(1) on the taxable part of gratuity.
This calculator is helpful for people who are covered in category three(given above) and retired before 29.03.2018 and received gratuity amount in the financial year 2022-23.
The calculator is given under. Fill only yellow cells. Click on "click on edit" to edit data. Enter data one by one slowly. The sheet may take time to update.
If the calculator is not opened below the click this link
Relief u/s 89(1) is an arithmetic exercise.
- First, calculate the tax rate( %)after the inclusion of taxable gratuity in the year of receipt.
- Second, calculate tax on the last three years' income after adding 1/3 of taxable gratuity each year.
- Calculate the average rate of tax for the last three years.
- Calculate tax on taxable gratuity amount @ rate calculated in (1) above.
- Calculate tax on taxable gratuity amount @ rate calculated in (3) above.
- Calculate tax relief u/s 89(1) by reducing value as per (4) minus value as per(5) above