What is Gratuity and how is it taxable?

​Gratuity refers to a lump sum payment that is made by an employer to an employee as a token of appreciation for the employee's long and meritorious service. Gratuity is typically paid at the time of retirement, resignation, or death of the employee.

Under the Payment of Gratuity Act, 1972, employers are required to pay gratuity to their employees who have completed a minimum of five(5) years of continuous service.

In the context of income tax in India, gratuity is treated as a retirement benefit and is exempt from tax up to a certain limit. The exemption limit for gratuity is Rs. 20 lakhs for non Government Employees and for government employees, the entire gratuity amount received is exempt from tax.

Any gratuity amount received by an employee that exceeds the exemption limit is subject to income tax as per the employee's income tax slab rate in the year of receipt. However, if the gratuity is received by the legal heirs of a deceased employee, it is exempt from income tax.