As we head towards retirement age there are numerous financial considerations. Tax saving is one of these considerations. There are various methods of saving tax and tax implications of Gratuity as stated in the [Income Tax Act](https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx). 

Therefore a thorough knowledge of retirement gratuity is all that you need to know. Here is all you need to know about the tax on retirement gratuity. 

## What is Gratuity? 

The amount that the employee receives at the time of his retirement from the employer for the services rendered by him is called a Gratuity. Ideally, it is given after you complete five years. Formerly it was not mandatory, it was offered as an appreciation. However modern reforms say that it is mandatory if the employee has completed five years according to the [Payment of Gratuity Act, 1972](https://clc.gov.in/clc/acts-rules/payment-gratuity-act).

## Impact of Amendment of Gratuity 
On March 29, 2018, the [Central Board of Direct Taxation](https://incometaxindia.gov.in/pages/about-us/central-board-of-direct-taxation.aspx) extended the gratuity exemption limit to 20 lakhs. The result of the amendment was that the gratuity amount on which the tax was levied was reduced.

The amendment proved to be a blessing for those employees who earn a higher
salary and are close to retirement. Moreover, it will also prove beneficial for the employees with an extended time until
retirement will benefit from the amendment. 

## Income tax on Gratuity Payment 

According to the [Income Tax Act 1961](https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx), Gratuity is considered a part of the salary and it is taxable. The gratuity amount has some special conditions under which it is exempted from tax.

 In case the employee dies, his nominee will receive the gratuity amount. In such a case the nominee is liable for the tax obligations for the gratuity received. 

## Income tax Exemption on Gratuity 

According to the type of employment of the individual, the tax exemption on gratuity is provided. 

### The following are the causes of various clauses of tax exemption:-

**1. Government Sector Employees**

If you are a government employee, be it in the state defense or local authority, the gratuity received by them will be fully exempted from tax. 

**2. Private Sector Employees** 

If you are an employee of the private sector and the Gratuity amount is less than 20 lakhs you don't have to pay tax. However, if the Gratuity amount is above 20 lakhs then you have to pay tax. 

**3. Employees not covered Under  the Payment of Gratuity Act**  

Do not stress if you are not an employee covered under the Gratuity Act, you can still receive gratuity and tax exemption (under specific conditions). Following are a few of them, whosoever is less will be eligible for the tax exemption.

a.  Employee tenure multiplied by the last ten months' average salary and a half month's salary. 
b.  The gratuity amount of 20 lakhs 
c.  Amount of Gratuity received.

## However, Gratuity is taxable if it exceeds the maximum limits: 


### What to do to gain full benefits of tax exemption on gratuity?


To get maximum benefits of tax exemption on gratuity it is best to plan and build your strategies as per the advice of financial investors.

Most people are not comfortable hiring a financial consultant or reaching out to a financial consultant. However, this is the most crucial decision they should make. 

In general, people consider tax consultants ITR preparers, but they are not merely ITR preparers. They design and plan your financial budget and finances respectively in a way that you are maximizing your wealth. 

Financial consultants are trained people with in-depth knowledge of finance and law. Taking their advice is the best decision.

Gratuity is the amount that can be a major support for an individual's old age. Thus a secure plan of tax exemption on gratuity can help you save a lot of money. You can make good investments using your prudence. In case of less knowledge and experience, one can always consult a financial advisor and take maximum benefits of the new amendments. We here at [PensionBox](https://pensionbox.in/) will keep you informed and help you in efficient pension plans.Keeping yourself updated with the reforms is also a crucial step for sound financial planning.

As we head towards retirement age there are numerous financial considerations. Tax saving is one of these considerations. There are various methods of saving tax and tax implications of Gratuity as stated in the Income Tax Act. 

Other Blogs You Must Read