Tax on Gratuity — Section 10(10) Exemption, Formula & Worked Examples

Updated: 3 June 2026 | Income-tax Act, 2025 | Section 10(10) & Payment of Gratuity Act

Tax on gratuity under Section 10(10):
• Government employees: Fully exempt — no limit.
• Private sector (Gratuity Act coverage): Exempt = least of — (a) 15 days salary × years of service ÷ 26, (b) ₹20 lakh, (c) actual gratuity received.
• Private sector (not covered by Gratuity Act): Exempt = least of — (a) half month’s average salary × years of service, (b) ₹20 lakh, (c) actual gratuity.
• Death / Disability: Fully exempt, no ceiling.

₹20L

Lifetime exemption ceiling for gratuity under Section 10(10) — applicable across all employers.
The ₹20 lakh limit was last revised in 2019. Amounts above ₹20L cumulative (from all employers across career) are taxed as salary income in the year of receipt.

Section 10(10) — Gratuity Exemption by Employee Category

Employee Type	Exemption Formula	Ceiling
Central / State Government employee (Section 10(10)(i))	Entire gratuity is exempt	No monetary ceiling
Private sector employee covered by Payment of Gratuity Act, 1972 (Section 10(10)(ii))	Least of: (a) (15/26) × last drawn monthly basic+DA × completed years (b) ₹20,00,000 (c) Actual gratuity received	₹20,00,000 lifetime
Private sector employee NOT covered by Payment of Gratuity Act (Section 10(10)(iii))	Least of: (a) ½ month’s average salary × completed years (b) ₹20,00,000 (c) Actual gratuity received	₹20,00,000 lifetime
Gratuity on death or permanent disability	Fully exempt regardless of amount	No ceiling

How to Calculate the Exempt Amount (Gratuity Act Employees)

For private sector employees covered under the Payment of Gratuity Act, 1972, the exemption is the least of three figures. Here is the key formula in detail:

Formula for Exempt Gratuity (Gratuity Act Employees)

Exempt Amount = (Monthly Basic + DA) × 15 ÷ 26 × Completed Years of Service

Subject to ceiling of ₹20 lakh. “26” = working days in a month. “15” = 15 days’ wage per year of service.

What counts as “salary” here? Only basic pay + Dearness Allowance (DA). HRA, special allowance, bonus, commission, and other components are excluded from this calculation.

Completed years of service: Fractions are rounded as per the Gratuity Act — if the last year of service is more than 6 months, it counts as a full year. Less than or equal to 6 months is ignored for this formula.

Worked Example — Gratuity Act Employee

Scenario: An employee retires after 20 years of continuous service. Last drawn basic salary ₹50,000/month. DA = NIL (private sector). Employer pays actual gratuity of ₹7,00,000.

Step	Calculation	Amount (₹)
(a) Formula-based exempt amount	₹50,000 × 15 ÷ 26 × 20	5,76,923
(b) Maximum ceiling	Lifetime limit under Section 10(10)	20,00,000
(c) Actual gratuity received	As per employer	7,00,000
Exempt amount = Least of (a), (b), (c)	Least = ₹5,76,923	5,76,923
Taxable gratuity	₹7,00,000 − ₹5,76,923	1,23,077

In this example, ₹1,23,077 is added to the employee’s total income and taxed at the applicable slab rate. Had the basic been higher (e.g., ₹2,17,000+/month), the formula amount would exceed the actual gratuity of ₹7L, making the full ₹7L exempt.

Employees Not Covered by Payment of Gratuity Act

Employees in establishments not covered by the Payment of Gratuity Act (typically companies with fewer than 10 employees, or certain categories excluded by the Act) still receive exemption under Section 10(10)(iii) but with a different formula:

Formula for Exempt Gratuity (Non-Gratuity Act Employees)

Exempt Amount = ½ × Average Monthly Salary × Completed Years of Service

Average monthly salary = average of 10 months salary preceding retirement/departure. “Salary” here = basic + DA + commission on fixed %. No rounding of partial years — only fully completed years count.

Key difference: Under Section 10(10)(ii) [Gratuity Act], partial years of 6+ months round up. Under Section 10(10)(iii) [Non-Gratuity Act], only fully completed years count — no rounding. This can significantly reduce the exempt amount for employees leaving mid-year.

Special Cases — Gratuity on Death & Disability

Where gratuity is paid on account of the death or permanent disability of the employee, the entire amount is fully exempt under Section 10(10) without any ceiling or formula limitation. This applies to:

Gratuity paid to legal heirs / nominee on employee’s death in service.
Gratuity paid to the employee on account of permanent total disability due to accident or disease.
There is no minimum service requirement for death/disability cases — even 1 year of service qualifies.

Frequently Asked Questions

What happens if gratuity received exceeds ₹20 lakh — is the excess taxable?

Yes. The ₹20 lakh exemption under Section 10(10) is a lifetime cap across all employers. If you receive ₹25 lakh in gratuity, ₹20 lakh is exempt and ₹5 lakh is added to your income and taxed at your applicable slab rate. If you have received gratuity from a previous employer and claimed exemption, the remaining exemption limit for the current employer reduces accordingly (e.g., if you claimed ₹8L earlier, only ₹12L remains for future exemption).

Is gratuity received on resignation taxable — or only on retirement?

Gratuity is taxable (subject to Section 10(10) exemption) regardless of whether you resign or retire — provided you have completed at least 5 years of continuous service. The exemption applies equally to resignation after 5 years, voluntary retirement, retirement on superannuation, or retrenchment. However, if gratuity is paid on death or permanent disability, it is fully exempt without any monetary ceiling and without the 5-year service requirement.

How are part-year services counted for gratuity — does 4 years 8 months count as 5 years?

Under the Payment of Gratuity Act, 1972, for the purpose of the 5-year eligibility threshold, if an employee has completed more than 6 months in the last year of service, it is rounded up to a full year. So 4 years and 7+ months is treated as 5 years and qualifies for gratuity. For calculating the gratuity amount (15/26 formula), each completed year of service counts, and a fraction of a year of 6 months or more is rounded up. For employees not covered by the Gratuity Act, only full completed years are counted (no rounding).

I received gratuity from two different employers — how is the ₹20L exemption applied?

The ₹20 lakh ceiling under Section 10(10) is a lifetime aggregate limit — not per employer. Each time you receive gratuity, the exemption claimed is cumulated. Example: If you received ₹6L from Employer A (fully exempt), and later receive ₹18L from Employer B, the remaining exemption is ₹14L (₹20L minus ₹6L already claimed). So from Employer B's ₹18L, only ₹14L is exempt and ₹4L is taxable. You must disclose prior gratuity exemptions claimed when computing current year exemption.

Is TDS deducted on gratuity by the employer?

Yes, employers are required to deduct TDS on any taxable portion of gratuity at the time of payment. The exempt portion (computed under Section 10(10)) is excluded from TDS. Only the amount exceeding the applicable exemption limit is subject to TDS at your slab rate. If your total gratuity is within the exemption limit, no TDS should be deducted. If TDS is deducted in excess, you can claim a refund by filing your Income Tax Return.

Related Pages & Calculators

Gratuity Calculator CTC to Gross Salary Income Tax Calculator New vs Old Tax Regime Section 80C Deductions Income Tax Return Filing

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