Gratuity Tax in India 2025 — Exemption Limit & Calculation

Updated: June 2025 | Section 10(10) | AY 2025-26

Quick Answer: Gratuity is exempt from tax under Section 10(10) of the Income Tax Act — in both old and new tax regimes. Government employees receive full exemption on any gratuity amount. For private-sector employees covered by the Payment of Gratuity Act, exemption is the least of: actual gratuity received, ₹20 lakh (revised in Budget 2023), or 15/26 × last drawn salary × years of service. For employees not covered by the Act, the exemption ceiling is also ₹20 lakh (or a lesser amount per the formula). Any gratuity above the exempt limit is added to income and taxed at slab rates.

₹20 Lakh

Gratuity exemption limit — applicable under both new and old tax regimes (Section 10(10)). Revised from ₹10 lakh in Union Budget 2023.

Gratuity Tax Exemption by Employee Category

The tax treatment of gratuity depends on which category your employer falls under.

Employee Category	Exemption Available	Formula / Limit	Tax on Excess
Government employees (Central / State / local authority)	Fully exempt — no limit	Entire gratuity exempt	Nil
Private sector — covered by Payment of Gratuity Act 1972	Least of three amounts	Actual gratuity or ₹20 lakh or (15/26 × last salary × years of service)	At applicable slab rate
Private sector — NOT covered by Payment of Gratuity Act	Least of three amounts	Actual gratuity or ₹20 lakh or (½ month's average salary × years of service)	At applicable slab rate

Note: "Years of service" is rounded to the nearest completed year for Gratuity Act employees.

Gratuity Calculation Formula

For employees covered by the Payment of Gratuity Act, the formula is:

Gratuity = (15 ÷ 26) × Last Drawn Monthly Salary × Years of Service

Where: 15 = 15 working days; 26 = working days in a month; Last Drawn Salary = Basic + Dearness Allowance only (not HRA or other allowances).

Example: Last salary ₹60,000/month, 12 years of service →
Gratuity = (15 ÷ 26) × 60,000 × 12 = ₹4,15,385 — fully exempt (below ₹20 lakh).

For employees not covered by the Gratuity Act, the formula uses ½ month's average salary (average of last 10 months) × completed years of service.

Component	Gratuity Act Covered	Not Covered by Act
Salary considered	Last drawn (Basic + DA)	Average of last 10 months (Basic + DA)
Days factor	15 days out of 26	Half month (15 out of 30)
Years of service	Completed years (round up if > 6 months)	Completed years only
Exemption ceiling	₹20 lakh	₹20 lakh

Gratuity in New Tax Regime vs Old Tax Regime

Many taxpayers wonder whether switching to the new tax regime affects their gratuity exemption. The answer is no — gratuity exemption under Section 10(10) is available under both regimes. It is not a deduction (Chapter VI-A) but an exemption under Chapter III, which is untouched by the new regime rules under Section 115BAC.

Tax Regime	Gratuity Exemption Available?	Section
Old Tax Regime	Yes — up to ₹20 lakh	10(10)
New Tax Regime (115BAC)	Yes — up to ₹20 lakh	10(10)

Frequently Asked Questions

Is gratuity taxable in India?

Gratuity is partially or fully exempt from tax under Section 10(10). Government employees enjoy complete exemption. Private sector employees get exemption up to ₹20 lakh (or the formula-calculated amount, whichever is lower). Only the amount exceeding the exempt limit is taxable as salary income.

What is the exemption limit for gratuity in 2025?

The gratuity exemption limit for private sector employees is ₹20 lakh, revised upward from ₹10 lakh in Budget 2023. This limit applies to the lifetime of an individual (aggregate from all employers). Government employees have unlimited exemption.

How is gratuity calculated for tax purposes?

For Gratuity Act-covered employees: (15/26) × last drawn salary (Basic + DA) × completed years of service. The exempt amount is the least of actual gratuity, ₹20 lakh, or this formula value. The taxable amount = actual gratuity minus exempt portion.

Is gratuity on resignation treated differently from retirement for tax?

Yes, with one nuance: for the Payment of Gratuity Act, an employee must complete 5 years of continuous service to be eligible. On resignation before 5 years, gratuity may not be legally payable. However, if gratuity is paid regardless, the same tax exemption rules under Section 10(10) apply — there is no extra tax penalty for resignation vs retirement.

Is gratuity exempt in the new tax regime?

Yes. Gratuity exemption under Section 10(10) is available in the new tax regime as well. It is an exemption under Chapter III of the Income Tax Act, not a deduction under Chapter VI-A. The new regime only withdraws Chapter VI-A deductions (like 80C, 80D) and certain allowances — not Section 10 exemptions for gratuity.

Gratuity Tax Near You

Expert CA/CS assistance for gratuity tax across India. Click your city for local details.

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