For the intent of taxation on gratuity employees are divided into two categories:

1. Government Employees
2. Private Employees

When gratuity is received by the employee within the duration of his service then gratuity is taxable and falls under the head of "salaries" irrespective of whether he is government employee or private employee.

But when gratuity is received by the employee at the time of his retirement, death or superannuation then tax exemption rules for government employees differs from private employees:

In case of Government Employees entire amount that he receives as gratuity becomes tax exempted. Therefore, a government employee does not have to pay any taxes when he receives gratuity at the time of his retirement, death or superannuation.

Again, to better understand the tax treatments for private employees, they are divided as:

1. Private employees covered under the payment of Gratuity Act of 1972.
2. Private employees not covered under the payment of Gratuity Act of 1972.

In case, when private employees covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent least of the following:

1. Statutory limit of Rs 10 lakhs.
2. 15 days salary based on salary drawn each year.
3. Gratuity received by him actually.

If the gratuity exceeds the limit mentioned above, then it becomes taxable in the hands of assessee. The assessee can claim tax relief under section 89 of Income Tax Act.

For private employees not covered under the payment of Gratuity Act of 1972, any gratuity received is tax exempted to the extent least of the following:

1. Half month's salary.
2. Statutory limit of Rs.10 lakhs.

3. Actual gratuity received.

Click here to read how to calculate gratuity?

So, gratuity is not fully exempted from tax. You should carefully see whether you have to pay taxes when you receive your gratuity.

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