Key Highlights
- Gratuity exemption under Schedule II, ITA 2025
- Government employees: fully exempt — no monetary limit
- Private sector (Payment of Gratuity Act): Exempt up to lowest of: Actual gratuity; Rs 20 lakh; or (15/26) × last salary × years of service
- Private sector (not covered): Exempt up to lowest of: Actual; Rs 20 lakh; or (1/2) × average salary × years
- Gratuity received during service (resignation <5 years): fully taxable
- Multiple employers: Rs 20 lakh is LIFETIME limit — across all employers
Legal Reference
Schedule II (gratuity exemption), Income Tax Act, 2025 | Payment of Gratuity Act, 1972 | Rs 20 lakh limit notified by Central Government | Corresponds to Section 10(10) of ITA 1961
1. What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a token of gratitude for long service. It is typically payable on retirement, superannuation, death, disablement, or termination after completing a minimum of 5 years of continuous service (waived in case of death or disablement). The Payment of Gratuity Act, 1972 governs gratuity for organisations employing 10 or more persons.
2. Gratuity Exemption Rules
| Category | Exemption |
|---|
| Central/State Government employees | Fully exempt — no limit |
| Private sector: covered by Payment of Gratuity Act | Least of: (a) Actual gratuity; (b) Rs 20,00,000; (c) [15/26 × Last Drawn Salary × Years of Service] |
| Private sector: NOT covered by Payment of Gratuity Act | Least of: (a) Actual gratuity; (b) Rs 20,00,000; (c) [1/2 × Average Salary × Years of Service] |
3. Gratuity Computation Example (Private Sector)
Illustrative only. Rajesh retires from a private company covered by the Gratuity Act after 30 years. Last drawn basic + DA = Rs 80,000/month. Actual gratuity received = Rs 18 lakh.
- Least of three: (a) Rs 18 lakh; (b) Rs 20 lakh; (c) 15/26 × 80,000 × 30 = Rs 13,84,615
- Exemption = Rs 13,84,615 (lowest of the three)
- Taxable gratuity = Rs 18 lakh − Rs 13,84,615 = Rs 4,15,385
- This Rs 4,15,385 is added to total income and taxed at slab rate
4. Gratuity from Multiple Employers
The Rs 20 lakh exemption is a LIFETIME AGGREGATE limit — not per employer. If you have received gratuity from a previous employer and claimed Rs 8 lakh exemption, your remaining lifetime limit is only Rs 12 lakh from future employers. Track gratuity exemption claimed across your career.
5. Gratuity on Death or Disablement
If gratuity is paid to the legal heir on the employee death, the entire amount is exempt regardless of the Rs 20 lakh limit. For the employee, gratuity on permanent total disablement is also fully exempt. The 5-year minimum service condition is waived in cases of death and disablement.
6. Why TaxClue
Gratuity tax computation involves precise calculation of the three-part formula and tracking lifetime exemption limits. TaxClue ensures your gratuity is correctly exempted in the ITR, excess is declared, and TDS deducted by employer is properly credited. Contact us for retirement benefit tax advisory.
Disclaimer
This article is for general informational and educational purposes only. It does not constitute legal, financial, or professional tax advice. Readers are advised to consult a qualified Chartered Accountant or tax professional before making any decisions. TaxClue Consultech Pvt Ltd accepts no liability. All case studies and examples in this article are illustrative only and do not represent actual persons or transactions.
Need Help with Compliance?
Our CA experts guide you through the entire process — registration to filing.
❓ Frequently Asked Questions
How much gratuity is tax-free?
Under Schedule II of the Income Tax Act, 2025, gratuity received by government employees is fully exempt without any monetary limit. For private sector employees covered by the Payment of Gratuity Act, the exemption is the lowest of: actual gratuity received; Rs 20,00,000; or 15/26 × last drawn salary × completed years of service. Rs 20 lakh is a lifetime aggregate limit across all employers.
Is gratuity received during resignation taxable?
If an employee resigns with less than 5 years of continuous service, gratuity (if paid by the employer voluntarily) is fully taxable — no exemption applies under Schedule II of ITA 2025. The minimum 5-year service requirement must be met for the exemption to apply. The only exceptions are death and permanent total disablement — where gratuity is always exempt regardless of service period.
What is the formula to calculate tax-exempt gratuity?
For private sector employees covered by the Payment of Gratuity Act, the tax-exempt portion is the lowest of three amounts: (1) Actual gratuity received; (2) Rs 20,00,000; (3) (15/26) multiplied by last drawn basic salary + DA, multiplied by the number of completed years of service (fraction above 6 months counted as a full year). For employees not covered by the Act, the formula uses half-month average salary and completed years.
Can I claim exemption if I received gratuity from two employers?
Yes, but the total exemption claimed from all employers combined cannot exceed Rs 20,00,000 in a lifetime under Schedule II of ITA 2025. If you claimed Rs 10 lakh exemption from your first employer, you can claim a maximum of Rs 10 lakh from any subsequent employer. You must track the cumulative gratuity exemption already availed and reduce the available limit accordingly when computing exemption from later employers.
Is gratuity paid to a nominee on employee death taxable?
No. Gratuity paid to the legal heir or nominee of a deceased employee is fully exempt from tax — there is no monetary cap. The full gratuity amount, regardless of how large it is, is exempt. The deceased employee 5-year service condition is also waived in case of death. This exemption is available under Schedule II of the Income Tax Act, 2025.
