what is gratuity in income tax

Gratuity is a voluntary payment made by an employer to an employee in appreciation of their services rendered. It can be paid in cash, debit card, credit card, or gift card, and may also come in the form of a non-cash perquisite. A service charge, on the other hand, is a mandatory gratuity. Both gratuities and service charges are forms of wage income and are subject to Social Security tax. The maximum tax-exempt gratuity limit is $20, and any employee who earned more than $20 in tips for the entire year must report their gratuity as income. Gratuity is taxed under the head “Salaries” as per the Income-tax Act, 1961, and is exempt from tax to the extent of the limit prescribed in Section 10(10) of the Act. The least of the three amounts mentioned in Section 10(10) is exempt from tax. The maximum limit of gratuity exempt from tax has been increased to Rs 20 lakh from the previous ceiling of Rs 10 lakh