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Guide · Salary & Deductions

Tax on Gratuity — Rs 20 Lakh Exempt u/s 10(10)

How gratuity is taxed, the Section 10(10) exemption by employee category, the 15/26 exemption formula and a step-by-step worked example of the taxable portion.

Written by: TaxClue Income-Tax Desk
Updated: 18 August 2026
Reading time: 5 min
Questions: 16 answered

Updated August 2026
CA Reviewed
Section 10(10) Exemption

Quick Answer

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.

Regime-neutral & renumbered under the 2025 Act

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.

At a glance

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 maths

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:

Formula (Gratuity Act employees)

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.

15/26

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

The 5-year service condition

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.

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Worked example

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)

(a) 50,000 × 15/26 × 20Rs 5,76,923

(b) Section 10(10) capRs 20,00,000

Exempt = leastRs 5,76,923

Taxable portion

Gratuity receivedRs 7,00,000

Less: exemptRs 5,76,923

Taxable balanceRs 1,23,077

Added to incomeRs 1,23,077

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

Step by step

How to Report Gratuity in Your ITR

1Get Form 16Employer shows gratuity & exempt part
2Compute exemptionLeast of formula / Rs 20L / actual
3Check prior claimsDeduct exemption already used earlier
4Report in ITRSalary schedule; exempt part u/s 10(10)
5Reconcile TDSClaim refund of any excess TDS

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

The Rs 20 lakh cap is a lifetime, cross-employer limit

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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Sources

Section 10(10): incometax.gov.in
Non-govt Rs 20 lakh cap: Notification S.O. 1213(E), 8 Mar 2019
Payment of Gratuity Act, 1972 (15/26 formula & 5-year rule)
Income-tax Act, 2025 — exemption continued w.e.f. AY 2026-27

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.

Tax on Gratuity — Frequently Asked Questions

Short, direct answers to the 16 questions readers ask most on this topic.

Gratuity is taxable as salary income, but Section 10(10) of the Income-tax Act exempts a large part of it. Government employees get a full exemption. Non-government employees are exempt up to the least of the 15/26 formula amount, Rs 20 lakh (lifetime cap) and the actual gratuity received; only the excess is taxed at slab rates. Gratuity on death or disability is fully exempt.

For non-government employees the maximum exemption is Rs 20,00,000 (Rs 20 lakh), a lifetime aggregate across all employers, set by notification in March 2019 and unchanged by Budget 2025. Government employees have no monetary ceiling — their gratuity is fully exempt. The exempt figure is still the least of the formula amount, this cap and the actual gratuity.

Yes. The Section 10(10) gratuity exemption applies under both the old and the new (default) tax regime. Unlike HRA, LTA or 80C — which are restricted to the old regime — the gratuity exemption is a statutory exemption of income and is not withdrawn under the new regime.

For an employee covered by the Payment of Gratuity Act, the formula amount is (last drawn Basic + DA) x 15 / 26 x completed years of service, where a part-year over 6 months rounds up. For an employee not covered by the Act, it is half a month's average salary (average of the last 10 months) x each fully completed year, with no rounding. The exemption is the least of this figure, Rs 20 lakh and the actual gratuity.

Only Basic pay plus Dearness Allowance (DA) is used. For Gratuity Act employees it is the last drawn Basic + DA; for non-Act employees it also includes commission based on a fixed percentage of turnover. HRA, special allowance, bonus, overtime and other allowances are all excluded from the exemption formula.

Under the Payment of Gratuity Act, an employee earns 15 days' wages for every completed year of service, and a month is treated as 26 working days (excluding four Sundays). So 15/26 of the monthly Basic + DA is the wage for each year of service. This is why the formula is (Basic + DA) x 15/26 x years.

For the 5-year eligibility test under the Gratuity Act, if you have worked more than 6 months in the final year it is rounded up to a full year, so about 4 years 7+ months is treated as 5 years and qualifies. For computing the gratuity amount too, a part-year over 6 months rounds up. Employees not covered by the Act count only fully completed years, with no rounding.

Yes. The Rs 20 lakh exemption is a lifetime cap. If you receive gratuity above the exempt amount, the excess is added to your income and taxed at your slab rate. For example, if Rs 20 lakh is exempt and you received Rs 25 lakh, Rs 5 lakh is taxable in the year of receipt.

The Rs 20 lakh ceiling is a lifetime aggregate, not per employer. Exemption already claimed is deducted from the cap. If you claimed Rs 6 lakh exemption earlier, only Rs 14 lakh remains — so from a later Rs 18 lakh gratuity, up to Rs 14 lakh is exempt (subject to the formula) and Rs 4 lakh is taxable. You must disclose prior exemptions when computing the current one.

The Section 10(10) exemption applies the same way whether you resign or retire, as long as you have completed at least 5 years of continuous service. It covers resignation after 5 years, voluntary retirement, superannuation and retrenchment. Only the amount above the exempt figure is taxed.

Gratuity under the Payment of Gratuity Act is normally payable only after 5 years of continuous service, so the question rarely arises. Where an employer pays a gratuity-like amount before 5 years (except on death or disability), it does not qualify as statutory gratuity and is generally taxable as salary. Death or disability gratuity is fully exempt with no minimum service.

No. Gratuity paid on the death or permanent disability of an employee is fully exempt under Section 10(10) with no monetary ceiling and no 5-year service requirement. This covers gratuity paid to the nominee or legal heirs on death in service, and to the employee on permanent total disability from accident or disease.

No. Gratuity received by Central Government, State Government and local authority employees is fully exempt under Section 10(10)(i), with no monetary limit. The Rs 20 lakh cap and the least-of formula apply only to non-government (private-sector) employees.

Employers deduct TDS under Section 192 only on the taxable portion of gratuity — the amount above the Section 10(10) exemption. If your gratuity is fully within the exemption, no TDS should be cut. If excess TDS is deducted, you claim a refund by filing your Income Tax Return.

Report the gross gratuity under the Salary head, then show the exempt portion under Section 10(10) so only the taxable balance is charged. Use your Form 16, your last drawn Basic + DA, completed years of service, and any exemption already claimed from earlier employers. Keep the gratuity letter and, for death/disability, the supporting certificate.

Yes, each has its own exemption. Gratuity is exempt under Section 10(10) up to Rs 20 lakh (non-govt); leave encashment on retirement is exempt under Section 10(10AA) up to Rs 25 lakh (non-govt); and provident fund and its interest are dealt with under Section 10(11)/(12). They are computed separately — see our leave-encashment and PF-withdrawal guides.