return to news
  1. Upstox
    /
  2. News
    /
  3. Personal Finance News
    /
  4. Tax
    /
  5. Is interest received on delayed payment of full gratuity taxable?

Personal Finance News

Is interest received on delayed payment of full gratuity taxable?

balwant jain
By Balwant Jain

4 min read | Updated on May 29, 2026, 10:27 IST

Google
SelectUpstoxas yourPreferred news source
Copy link
Twitter Page
Linkedin Page
Whatsapp Page

SUMMARY

Can interest received on delayed payment of gratuity be taxed? A retired NCESS scientist seeks clarity on income tax liability after receiving gratuity arrears with 10% interest following a long legal battle.

Is interest received on delayed payment of full gratuity taxable?

As far as interest on delayed payment of gratuity is concerned, it does not enjoy any tax exemption and is taxed as interest, not salary, because it is paid for the delayed payment of gratuity and not for services rendered in the past. | Image: Shuttersto

After a prolonged legal battle over unpaid retirement benefits, a group of retired scientists finally received the balance gratuity due to them along with substantial interest for the delay.

Open FREE Demat Account within minutes!
Join now

While the gratuity itself is exempt from tax, uncertainty remains over whether the interest paid on the delayed settlement would attract income tax liability. Today's Q&A explains such details in response to a query by a reader.

Question: I was working in the National Centre for Earth Science Studies, Trivandrum (NCESS), during 1986-2013 under the Science and Technology of the Govt. of Kerala with CSIR parity in pay and allowances. In 2014, on January 1, it was taken over by the Ministry of Earth Science with all its assets, liabilities, and the manpower employed. When I retired, in November, 2013, I was given only gratuity with a ceiling of Rs 10 lakh, though I am eligible for full gratuity without a cap. Later myself along with 8 other scientists, questioned this in the High Court of Kerala, citing earlier High Court judgements and orders.
After several rounds of litigation, the High Court directed the NCESS to pay the balance of the Gratuity with 10 percent simple interest.
We got the amount around 10 lakh each, and interest for the last 13 years @ 10 per cent interest, more than the principal component!  Now, the question is, are we liable to pay Income tax on the delayed payment of the full Gratuity?  NCESS has not deducted TDS on the interest at source, as it may be against the High Court order. Your valuable opinion is sought. I am regularly submitting ITR, and the source of income is pension and other interests on bank deposits, which do not come under Income tax liability at present and in future also. But this is an unusual situation.
Answer: Any amount received from the present or ex-employer in respect of services rendered is taxed under the head salaries. As per Section 10 (10) of the Income Tax Act, 1961, gratuity received by Central Government employees is fully exempt without any monetary limit; therefore, the ten lakh received by you as gratuity is fully exempt in your hands.
As far as interest on delayed payment of gratuity is concerned, it does not enjoy any tax exemption and is taxed as interest, not salary, because it is paid for the delayed payment of gratuity and not for services rendered in the past. Such interest is taxable under the head “Income from other sources” and is required to be added to your other income of the year and taxed at the slab rate applicable to you.

Though a person is required to pay advance tax if his net tax liability exceeds ten thousand rupees in a year, senior citizens who do not have any income taxable under the head “Profits and Gains of Business or Profession” are exempt from the requirement to pay advance tax.

Such a person can discharge their tax liability while filing their ITR, but not after the due date for filing the ITR. So you will not have to pay any interest on the tax payable in respect of interest received by you if you pay your taxes and file your ITR by 31st July 2026.
Have a personal finance, mutual fund, or income tax query? We will try to get them answered by experts. Write to sangeeta.ojha@rksv.in
For all personal finance updates, visit here

Disclaimer: The views and opinions expressed above are those of respective experts/commentators and do not reflect the views of Upstox. The above Q&A is only for informational purposes and should not be considered investment or tax advice from Upstox. Please consult a tax expert for your complex tax problems.

About The Author

balwant jain
Balwant Jain is a Mumbai-based tax and investment expert.

Next Story