Gratuity is exempt from tax under Section 10(10) — in both the old and the new tax regimes. Government employees get 100% exemption on any amount. For private-sector staff covered by the Payment of Gratuity Act, the exemption is the least of: actual gratuity received, Rs 20,00,000 (raised from Rs 10 lakh), or 15/26 × last drawn salary (Basic+DA) × years of service. Any gratuity above the exempt amount is added to salary income and taxed at your slab rate.
Gratuity relief sits in Chapter III (Section 10) as an exemption, not in Chapter VI-A as a deduction. The new tax regime under Section 115BAC withdraws deductions like 80C and 80D but leaves Section 10(10) intact — so your Rs 20 lakh gratuity exemption survives whichever regime you pick.
Gratuity Tax Exemption by Employee Category
The tax treatment of gratuity depends on your employer type and whether the Payment of Gratuity Act, 1972 covers you.
| Employee category | Exempt? | Exemption limit | Tax on excess |
|---|---|---|---|
| Government (Central / State / local authority) | Fully | Entire gratuity — no ceiling | Nil |
| Private — covered by Payment of Gratuity Act | Partly | Least of actual / Rs 20L / 15÷26 × salary × years | Slab rate |
| Private — NOT covered by the Act | Partly | Least of actual / Rs 20L / ½ month avg salary × years | Slab rate |
The Rs 20 lakh ceiling is a lifetime aggregate across all employers, not per job. Rate for excess follows your income-tax slab.
Gratuity Calculation Formula
For employees covered by the Payment of Gratuity Act, the exempt formula amount is:
Exempt = (15 ÷ 26) × last drawn monthly salary (Basic + DA) × completed years of service — where 15 = days' wages, 26 = working days in a month. Years of service are rounded up if the last part-year exceeds 6 months. The final exemption is the least of this figure, Rs 20 lakh and the actual gratuity received.
| Component | Covered by Gratuity Act | Not covered by the Act |
|---|---|---|
| Salary considered | Last drawn (Basic + DA) | Average of last 10 months (Basic + DA) |
| Days factor | 15 out of 26 | ½ month (15 out of 30) |
| Years of service | Completed years (round up if > 6 months) | Completed years only |
| Exemption ceiling | Rs 20 lakh | Rs 20 lakh |
Basic + DA only — HRA and other allowances are excluded from the gratuity salary base.
Under the Payment of Gratuity Act, an employee normally needs 5 years of continuous service to be eligible (relaxed for death or disablement). If gratuity is nevertheless paid, the same Section 10(10) exemption applies — there is no extra tax penalty for resignation versus retirement.
How the Taxable Gratuity Is Worked Out
Take a private-sector employee covered by the Act, last drawn Basic + DA of Rs 90,000/month, 22 completed years of service, who receives Rs 24 lakh gratuity on retirement.
Formula amount (15÷26 × salary × years)
Exemption = least of three
The exemption is the least of the three — here the formula value of Rs 11,42,308. So taxable gratuity = Rs 24,00,000 − Rs 11,42,308 = Rs 12,57,692, added to salary income and taxed at the applicable slab. A smaller Rs 4,15,385 gratuity (e.g. 12 years at Rs 60,000) would be fully exempt, being below both the cap and the formula value.
✓Likely fully exempt if
- You are a government employee (any amount)
- Your gratuity is below Rs 20 lakh AND below the formula value
- Your salary base (Basic + DA) and tenure are modest
!Part of it is taxable if
- Gratuity exceeds the 15÷26 formula value
- Total lifetime gratuity crosses Rs 20 lakh
- High Basic+DA with long service pushing the payout above the least figure
Not sure how much of your gratuity is taxable?
Get an expert calculation →New Regime, Old Regime & Other Retirement Payouts
Switching to the new tax regime does not affect your gratuity exemption — Section 10(10) applies identically under both. The same is true for most other retirement benefits, each with its own Section 10 cap.
Old regime — gratuity exempt
- Gratuity exempt up to Rs 20 lakh (s.10(10))
- Chapter VI-A deductions (80C, 80D) also allowed
- Standard deduction Rs 50,000 (salaried)
New regime (default) — still exempt
- Gratuity exempt up to Rs 20 lakh (s.10(10))
- Most 80C/80D deductions withdrawn
- Standard deduction Rs 75,000 (salaried)
- Rebate u/s 87A up to Rs 12 lakh taxable income
| Retirement payout | Section | Non-govt exemption cap |
|---|---|---|
| Gratuity | 10(10) | Rs 20,00,000 |
| Leave encashment on retirement | 10(10AA) | Rs 25,00,000 |
| Retrenchment compensation | 10(10B) | Rs 5,00,000 |
| Commuted pension | 10(10A) | Formula-based |
Leave encashment cap was raised from Rs 3 lakh to Rs 25 lakh from FY 2023-24. Government employees are fully exempt on all of these.
Reporting Gratuity When You File
- 1Get Form 16Employer shows gratuity paid & exempt part
- 2Apply least-of-threeExempt = least of actual / Rs 20L / formula
- 3Report the exempt partUnder s.10(10) in the exempt-income schedule
- 4Add taxable excessTo salary income at slab rate
- 5Verify & fileITR-1 / ITR-2 with proofs kept on record
- Form 16 / gratuity payment letter
- Years of continuous service confirmed
- Whether Payment of Gratuity Act covers you
- Last drawn Basic + DA (or 10-month average)
- Any earlier gratuity counted toward Rs 20 lakh
- Correct regime selected before filing
Want us to compute the exempt portion and file your return?
Get ITR Filing Help →- Section 10(10) gratuity: incometax.gov.in
- Rs 20 lakh cap: CBDT Notification 16/2019 (non-government employees)
- Payment of Gratuity Act, 1972 — eligibility & 15/26 formula
- Leave encashment Rs 25 lakh: Notification 31/2023 under s.10(10AA)
Disclaimer: This guide is general information based on the law and notifications in force when it was last updated. It is not professional advice for your case — rates, thresholds and due dates change, so check the current position with the official source before you act on it.