Gratuity is taxable as salary income, but Section 10(10) exempts a large part of it. For government employees the entire gratuity is exempt. For non-government employees the exemption is the least of (a) the 15/26 formula amount, (b) Rs 20,00,000 (lifetime cap across all employers), and (c) the actual gratuity received. Gratuity paid on death or disability is fully exempt, with no ceiling. Only the excess over the exempt amount is added to income and taxed at your slab rate.
The Section 10(10) gratuity exemption is available in both the old and the new (default) tax regime — unlike HRA or 80C, it is not a regime-restricted deduction. From AY 2026-27 the exemption carries into the Income-tax Act, 2025, with the Rs 20 lakh non-government ceiling (set by notification in March 2019) unchanged.
Section 10(10) Exemption by Employee Category
How the gratuity exemption is worked out depends on who your employer is and whether you are covered by the Payment of Gratuity Act, 1972. See our gratuity calculator to estimate the amount first.
| Employee category | Exemption | Ceiling | Taxable? |
|---|---|---|---|
| Central / State Government & local authority | Fully exempt | No limit | No tax |
| Non-govt, covered by Gratuity Act, 1972 | Least of formula / cap / actual | Rs 20,00,000 | Excess taxed |
| Non-govt, NOT covered by Gratuity Act | Least of formula / cap / actual | Rs 20,00,000 | Excess taxed |
| Any employee — death or permanent disability | Fully exempt | No limit | No tax |
The Rs 20,00,000 ceiling is a lifetime aggregate across all employers, not per employer (Notification S.O. 1213(E), 8 Mar 2019).
The 15/26 Gratuity Exemption Formula
For a non-government employee covered by the Payment of Gratuity Act, 1972, the formula-based figure (limb "a" of the least-of test) is:
Exempt (formula) = (last drawn Basic + DA) × 15 ÷ 26 × completed years of service. "26" is the assumed working days in a month and "15" is 15 days' wages per year. A part-year of more than 6 months is rounded up to a full year.
For an employee NOT covered by the Gratuity Act, limb "a" is instead half a month's average salary (average of last 10 months) × each fully completed year — with no rounding of the part year. "Salary" here means Basic + DA + commission on a fixed percentage of turnover; HRA, other allowances and bonus are excluded in both cases.
Covered by Gratuity Act
- (Basic+DA) × 15/26 × years
- Part year > 6 months rounds up to a year
- Salary = last drawn Basic + DA
- Applies to most factories/shops with 10+ staff
Not covered by Gratuity Act
- ½ × avg 10-month salary × years
- Only fully completed years — no rounding
- Salary = Basic + DA + fixed-% commission
- Exemption is usually a little lower
Gratuity under the Act is generally payable only after 5 years of continuous service — so the exemption question arises on resignation, retirement, superannuation or retrenchment after 5 years. The 5-year rule is waived where gratuity is paid on death or permanent disability, and that gratuity is fully exempt regardless of amount.
Not sure how much of your gratuity is taxable?
Ask a TaxClue expert →How Much Gratuity Is Actually Taxed?
Take a private-sector employee covered by the Gratuity Act who retires after 20 years, last drawn Basic Rs 50,000/month (DA nil), and receives Rs 7,00,000 gratuity. The exempt amount is the least of the three limbs below.
The three limbs (least wins)
Taxable portion
So Rs 1,23,077 is taxed at the employee's slab rate and the rest is exempt. If the basic salary had been high enough for limb (a) to exceed Rs 7,00,000, the whole gratuity would be exempt. Check the rate that applies to you on our income-tax slabs page.
Likely fully exempt if
- You are a Central/State Government employee
- Gratuity is paid on death or permanent disability
- Actual gratuity is below the 15/26 formula amount
- Lifetime gratuity received stays under Rs 20 lakh
Part will be taxable if
- Actual gratuity exceeds the formula figure
- Cumulative gratuity crosses the Rs 20 lakh cap
- You resigned with under 5 years (Act gratuity not due)
- You are in a non-Act firm and left mid-year
How to Report Gratuity in Your ITR
- Form 16 / gratuity payment letter
- Last drawn Basic + DA figures
- Completed years of continuous service
- Whether employer is covered by Gratuity Act
- Gratuity + exemption claimed from earlier employers
- Death / disability certificate (if applicable)
- Exempt amount entered under Section 10(10)
- Taxable balance added to salary income
If you claimed, say, Rs 8 lakh gratuity exemption at an earlier job, only Rs 12 lakh of exemption remains for later gratuity — not a fresh Rs 20 lakh each time. Employers deduct TDS on the taxable portion under Section 192; if excess TDS was cut, you recover it by filing your return.
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