She serves as Deputy Manager of Content at Fibe, bringing over 9 years of writing experience across FinTech and beyond. With more than 6 years of specialised expertise in data-driven content for lending platforms and financial services, she has built a focused career in digital lending, personal finance, broking, investment education and making the world of FinTech understandable to everyday readers.
This article explains the gratuity exemption limit under Indian income tax law, who qualifies for full or partial exemption, and the exact formulas used to calculate gratuity tax for government employees, private employees and those not covered under the Gratuity Act.
Gratuity is taxable only beyond a ₹20 lakh limit. Under Section 10(10) of the Income Tax Act, 1961, this is the gratuity tax exemption limit available to private-sector employees covered under the Payment of Gratuity Act, 1972. Government employees get a full tax exemption on gratuity, no matter the amount. This guide breaks down the current gratuity exemption limit, who qualifies, the governing law and the exact formula used to work out tax on gratuity, so you know precisely what you owe and what you keep.
QUICK STAT
The gratuity tax exemption limit was raised from ₹10 lakhs to ₹20 lakhs to reflect rising salary levels among Indian employees. (Source: Payment of Gratuity Act, 1972 (as amended))
Gratuity is a lumpsum benefit your employer pays you over and above your regular salary, as a reward for long, continuous service. The Payment of Gratuity Act, 1972 governs this benefit for any establishment with 10 or more employees, and it kicks in once you complete 5 continuous years with that employer.
There’s one important exception worth flagging early: if an employee dies or becomes disabled due to an accident or disease, the 5-year condition is waived entirely. The gratuity becomes payable immediately, regardless of tenure.
You become eligible to receive gratuity in 3 situations:
Superannuation, meaning you’ve reached the retirement age set by your employer
Retirement or resignation, after completing 5 years of continuous service
Death or disablement of the employee, with no minimum service requirement
Tax Liability on Gratuity
Here’s the part most people get wrong: gratuity isn’t automatically tax-free just because it’s a retirement benefit. Under the Income Tax Act, 1961, gratuity becomes taxable once it crosses a specific threshold, and that threshold depends on which category of employee you fall under.
The exemption limit itself has changed over the years. It stood at ₹10 lakhs for a long stretch, and the government later revised it upward to ₹20 lakhs, recognising that rising salaries meant the old cap was taxing ordinary retirement payouts.
Aspect
Details
Governing Section
Section 10(10), Income Tax Act, 1961
Current Exemption Limit
₹20 lakhs (revised upward from ₹10 lakhs)
Employee Categories
Government employees; private employees covered under the Gratuity Act; employees not covered under the Gratuity Act
Tax Head
‘Salaries’ for the employee; ‘Income from Other Sources’ if paid to a nominee or legal heir
Gratuity Tax Rules
A few specific rules govern how gratuity gets taxed in practice:
In cases of retirement, resignation, death and a few other defined situations, gratuity may be exempt from tax under Section 10(10) of the Income Tax Act, 1961
Gratuity received by an employee during their working life is taxed under the ‘Salaries’ head
If the employee passes away, the gratuity is paid out to their nominee or legal heir instead
That payout to a nominee or legal heir is classified differently for tax purposes — it falls under ‘Income from Other Sources’
Is Gratuity Taxable on Resignation?
This is where things diverge sharply by employer type. Government employees get full tax exemption on gratuity whether they retire or resign — no upper limit applies. Private-sector employees, on the other hand, get a tax exemption capped at ₹20 lakhs under Section 10(10), regardless of whether they retired or resigned.
WATCH OUT
The ₹20 lakh exemption is a lifetime aggregate, not a per-employer limit. If you’ve already used part of it on a previous job’s gratuity, any new payout counts against the same ceiling.
If your total gratuity across your career exceeds ₹20 lakhs, the excess gets added to your taxable income and taxed at your applicable income slab rate.
What is the Gratuity Exemption?
Gratuity exemption is the portion of your gratuity receipt that the Income Tax Act lets you keep tax-free. Under Section 10(10), the rules split into three distinct employee categories, and which one you fall into changes your exemption calculation entirely:
Government employees, who receive full tax exemption regardless of the amount
Private employees covered under the Payment of Gratuity Act, 1972, who can claim exemption up to ₹20 lakhs
Employees not covered under the Payment of Gratuity Act, who follow a separate, more conservative formula explained further below
Knowing which bucket applies to you is the single most useful thing you can do before estimating your tax outgo on retirement or resignation.
Income Tax Exemption on Gratuity: Category-wise Rules
Exemptions for Government Employees
If you work in any of the following government services, your gratuity is fully exempt from tax on termination, retirement, superannuation or disablement:
Central Government
State Governments
Defence Sector
Civil Services
Local Municipal Authorities
Also read: Difference between direct tax and indirect tax
Exemption for Private Employees
If you work in the private sector and your employer is covered under the Payment of Gratuity Act, 1972, your exemption is capped at ₹20 lakhs in aggregate. A few specifics to keep in mind:
The aggregate gratuity you receive across your entire career must not exceed ₹20 lakhs to claim full exemption
This limit applies cumulatively, not per employer, so gratuities from multiple jobs all count towards the same ceiling
Any gratuity paid for service beyond 15 days for each completed year becomes taxable
Salary, for this calculation, includes only your basic pay and dearness allowance (DA), nothing else
PRO TIP: Quick formula: Gratuity = Last drawn salary x 15 x number of completed years of service / 26. The ’26’ assumes a 26-day working month, since, 4 Sundays are excluded.
Suppose Ayush, a marketing manager in Bengaluru, retires after 12 years of continuous service with a last-drawn basic salary plus DA of ₹50,000. His gratuity works out to ₹50,000 x 15 x 12 / 26, which comes to approximately ₹3,46,154. Since this comes under the ₹20 lakh exemption limit, the entire amount is tax-free in Ayush’s hands.
Note that you can also use an online gratuity calculator to verify this figure instantly, particularly useful if your service period includes partial years.
Gratuity Tax Exemption for Employees Not Covered Under the Gratuity Act
Not every employer falls under the Payment of Gratuity Act, 1972 — smaller establishments with fewer than 10 employees, for instance, may pay gratuity voluntarily without being legally bound by the Act. If you fall into this category, a different and slightly less generous formula applies.
For employees not covered under the Act, the gratuity exemption is the least of the following three amounts:
₹20 lakhs (the statutory ceiling)
The actual gratuity received
Half a month’s average salary for each completed year of service, calculated using the average of your last 10 months’ salary
DID YOU KNOW?
Formula for employees not covered under the Act: Gratuity = Average salary of last 10 months x 1/2 x number of completed years of service.
Let’s say Priya, a senior associate in Pune, worked for an 8-employee firm for 9 years. Her average monthly salary over the last 10 months was ₹40,000, and she received a gratuity payout of ₹2,00,000 on resignation. Her exemption is the least of ₹20 lakhs, the actual ₹2,00,000 received, and ₹40,000 x 1/2 x 9, which is ₹1,80,000. Since ₹1,80,000 is the lowest figure, that’s her tax-free portion — the remaining ₹20,000 gets added to her taxable income.
This distinction matters because employees at smaller firms often assume the same ₹20 lakh, 15-day formula applies to them. It doesn’t, and getting this wrong can mean an unpleasant surprise at tax filing time.
By understanding how income tax on gratuity works and which exemption category applies to you, you can plan your retirement payout and tax filing with far more confidence. That said, life doesn’t always wait for your gratuity payout. If you need funds before that happens, you can get an Instant Personal Loan of up to ₹10 lakhs in just 2 minutes on Fibe.
Download the Fibe Personal Loan App or sign up on our website to access quick financing whenever you need it.
FAQs On Gratuity Exemption Limit
1.Is gratuity taxable or non-taxable?
Gratuity is taxable under the Income Tax Act, 1961, but you can claim exemption on receipts up to ₹20 lakhs under Section 10(10), depending on your employee category.
2.How is gratuity calculated for income tax purposes?
For employees covered under the Gratuity Act, use: Gratuity = Last drawn salary x 15 x number of years of service / 26.
3.How many times can the gratuity exemption be claimed?
There’s no cap on the number of times you can claim it across your career, but the cumulative tax-free amount across all claims cannot exceed ₹20 lakhs.
4.Is gratuity taxable for government employees upon retirement?
No. Gratuity paid to government employees on retirement, superannuation or termination is fully exempt from tax, with no upper limit.
5.What is the gratuity exemption section in the Income Tax Act?
Section 10(10) of the Income Tax Act, 1961 governs gratuity exemption, currently set at ₹20 lakhs.
6.Is gratuity a part of CTC taxable?
Gratuity usually forms part of your CTC, but it isn’t taxed when accrued. It’s only taxed when you actually receive it, and only the amount exceeding ₹20 lakhs gets added to your taxable income.
7.Is gratuity taxable in India for private sector employees?
Yes, but only beyond ₹20 lakhs. Private employees covered under the Gratuity Act get exemption up to this limit; anything received above it is taxed as per their income slab.
8.Is gratuity taxable on resignation before completing 5 years of service?
Generally, gratuity isn’t payable at all if you resign before completing 5 continuous years, except in cases of death or disablement, where the service condition doesn’t apply.
9.Is gratuity taxable when received on death or disability?
Gratuity paid to an employee on disablement is taxed under the same Section 10(10) exemption rules as regular gratuity. If paid to a nominee or legal heir after the employee’s death, it’s taxed under ‘Income from Other Sources’ rather than ‘Salaries’, though the exemption limit still applies.
