Taxability of Gratuity, Part of Gross Salary

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If your employer deducts a monthly amount for gratuity from your CTC, it typically forms a gratuity fund and isn't considered part of your gross salary for income tax purposes until paid. If you leave before five years and receive this as an ex-gratia payment, it's generally not subject to TDS. However, lump-sum gratuity payments upon retirement or resignation are taxable, subject to exemption limits.

Deepak Rawat

Deepak Rawat (Querist)
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08 April 2023 Hi Experts,
I want to know the taxability of Gratuity that is part of my CTC. My employer is deducting Rs. 1200 as gratuity from my monthly CTC. Will it be part of my Gross Salary for the purpose of Income Tax Calculation?
Plz advice

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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08 April 2023 It will not be part of gross salary for the purpose of income tax

CA Sanat Pyne

CA Sanat Pyne (Expert)
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08 April 2023 In your case, if your employer is deducting Rs. 1200 from your monthly CTC towards gratuity, it means that they are creating a gratuity fund for you. This amount will not be considered as part of your gross salary for the purpose of income tax calculation, as it is not paid to you immediately but will be paid to you upon completion of five years of continuous service with the organization.
However, if your employer pays you gratuity as a lump sum amount at the time of your retirement or resignation, then it will be taxable as per the specified exemption limit. It will be added to your income and taxed accordingly.

Deepak Rawat

Deepak Rawat (Querist)
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08 April 2023 Thank U Sir...
My employer have a policy that if employee leave before 5 years then they paid the gratuity amount (Monthly 1200) as Ex gratia.
In this case, will it be considered in Gross Salary for the purpose of TDS Calculation? Or the provision will be same as per gratuity?

CA Sanat Pyne

CA Sanat Pyne (Expert)
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08 April 2023 Ex-gratia payments are typically treated as separate from regular salary and are not subject to TDS (tax deducted at source) in India. This means that your employer is not required to deduct TDS on the ex-gratia amount. However, it's important to note that the tax treatment of ex-gratia payments may vary based on the specific circumstances of your employment contract and the applicable tax laws. .
Circular : No. 573, dated 21-8-1990.

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