Gratuity Tax Exemption (2026): Rs 20 Lakh Limit, Formula & Rules

Quick answer

Gratuity tax works like this: gratuity up to Rs 20 lakh is tax-free for private-sector employees when it is paid on retirement, resignation, death, or disablement. Government employees get the full amount tax-free, with no ceiling. Any amount above the exempt limit is added to your salary income and taxed at your slab rate.

Gratuity paid at the end of service is exempt from tax up to Rs 20 lakh for private employees, and fully exempt for government employees. The exempt amount is the lowest of the gratuity actually received, the statutory formula amount, and the Rs 20 lakh lifetime ceiling. The balance, if any, is taxed as salary income.

What is gratuity, and when is it paid?

Gratuity is a lump sum your employer pays as a thank-you for long service. It is not a bonus you can ask for every year. It is paid when your employment ends — on retirement, resignation, death, or disablement.

Under the gratuity law, an employee usually needs 5 years of continuous service with the same employer to qualify. The 5-year rule does not apply if employment ends because of death or permanent disablement. The law covers establishments with 10 or more employees, but smaller employers can also pay gratuity on their own — and the tax rules treat those two cases differently, as explained below.

Gratuity received while you are still in service is a different story. It does not get any exemption. The full amount is taxed as salary in the year you receive it.

Is gratuity taxable in India?

Yes, but only in part. Gratuity sits under the head “Income from Salary” — the same head that covers other salary exemptions such as HRA. The law then carves out an exemption, and only the part above the exemption is taxed.

The old rule is Section 10(10) of the Income Tax Act, 1961. From Tax Year 2026-27, the Income-tax Act, 2025 applies, and the salary exemption for gratuity sits in Section 19 of the new Act. The money limits and formulas did not change with the renumbering.

The exemption is available in both the old and the new tax regime. That matters because most deductions vanish in the new regime — gratuity exemption is not a deduction, it is an exemption, so it survives in both.

What is the tax-free limit on gratuity?

For private-sector employees, the tax-free limit is Rs 20 lakh in total across your whole career. It is a lifetime limit, not a per-employer limit. If you used Rs 6 lakh of exemption with one employer, only Rs 14 lakh remains for later employers.

The Rs 20 lakh ceiling was raised from Rs 10 lakh by CBDT Notification No. S.O. 1213(E) dated 8 March 2019, and it applies to employees who retired, died, resigned, or became disabled on or after 29 March 2018.

For government employees — Central Government, State Government, and local authority staff — there is no ceiling at all. The full gratuity is exempt, whatever the amount.

How is gratuity tax calculated?

Your employer category decides the formula. In both cases, “salary” means basic pay plus dearness allowance (DA) only. House rent allowance, bonuses, and other allowances do not count.

Employees covered by the gratuity law

Most organised-sector private employees fall here. The exempt amount is the lowest of these three:

1. The gratuity actually received
2. (Last drawn salary × 15 × completed years of service) ÷ 26
3. Rs 20,00,000

The 26 stands for working days in a month, and 15 stands for 15 days of wages per year of service. A service period of more than 6 months in the final year counts as a full year.

Worked example 1 — fully exempt. Last drawn basic + DA is Rs 80,000 a month, and service is 21 years and 8 months, counted as 22 years. Formula amount = (80,000 × 15 × 22) ÷ 26 = Rs 10,15,385. If the employer pays exactly that amount, the whole Rs 10,15,385 is exempt, because it is below the Rs 20 lakh ceiling. Taxable gratuity: nil.

Worked example 2 — ceiling bites. Last drawn basic + DA is Rs 1,50,000 a month, and service is 30 years. Formula amount = (1,50,000 × 15 × 30) ÷ 26 = Rs 25,96,154. The exempt part is capped at Rs 20,00,000. The remaining Rs 5,96,154 is added to salary income. If that extra income falls in the 30% slab, the extra tax is roughly Rs 5,96,154 × 30% = Rs 1,78,846, plus 4% cess, about Rs 1,86,000 in total. Your final bill depends on your total income and slab.

Employees not covered by the gratuity law

This covers smaller establishments where gratuity is paid voluntarily. The exempt amount is again the lowest of three figures:

1. The gratuity actually received
2. Half a month’s average salary for each completed year of service — average basic + DA of the last 10 months × ½ × years of service
3. Rs 20,00,000

Worked example 3 — not covered. Average basic + DA of the last 10 months is Rs 60,000, and service is 18 years. Formula amount = 60,000 × ½ × 18 = Rs 5,40,000. If the employer pays Rs 6,00,000, only Rs 5,40,000 is exempt, and Rs 60,000 is taxed as salary.

Is gratuity exempt in the new tax regime?

Yes. The gratuity exemption applies in both regimes, with the same Rs 20 lakh ceiling for private employees. The new regime removes deductions like Section 80C and HRA, but it does not touch the gratuity exemption. A private employee gets the same ceiling whichever regime they pick, so gratuity alone is never a reason to pick one regime over the other.

What happens to gratuity received on death?

If an employee dies, gratuity is paid to the nominee or legal heirs. (Family pension paid after death follows its own rules — see our guide to pension income tax.) The same exemption rules apply — fully exempt for government employees, and up to the Rs 20 lakh lifetime ceiling for private employees, worked out with the same formulas. The 5-year service condition is waived in death cases, so the family still gets the payment even if service was short.

Can you get relief on the taxable part of gratuity?

Yes, in some cases. The taxable part of gratuity is a lump sum for many years of service, so it can push you into a higher slab in one year. Section 89(1) relief lets you spread that tax hit. You claim it by filing Form 10E before you file your return. Without Form 10E, the relief can be denied, so file the form first if you plan to claim it.

Your employer deducts TDS on the taxable portion as part of salary TDS. Retirement payouts are taxed differently from each other — for example, EPF withdrawal has its own 5-year rule and TDS threshold. The exempt portion shows up in Form 16 and does not attract tax. When you file your return, check Form 16 against the calculation above — payroll errors on the 15/26 formula and the 6-month rounding rule are common, and they are worth catching before you file.

What changed recently?

Two changes are worth knowing. First, the gratuity payment law moved from the Payment of Gratuity Act, 1972 to the Code on Social Security, 2020, which came into force on 21 November 2025. The tax exemption ceiling stays at Rs 20 lakh. Second, from Tax Year 2026-27 the Income-tax Act, 2025 replaces the 1961 Act, and the gratuity exemption now sits in Section 19 of the new Act instead of the old Section 10(10). The limits, formulas, and both-regime treatment are unchanged.

Gratuity tax at a glance

Employee type	Tax-free amount	Formula used
Government employee	Full amount, no ceiling	Not applicable
Private, covered by gratuity law	Lowest of actual, formula, Rs 20 lakh	(Last drawn basic + DA) × 15 × years ÷ 26
Private, not covered by gratuity law	Lowest of actual, formula, Rs 20 lakh	(Average basic + DA of last 10 months) × ½ × years

Frequently asked questions

Is gratuity fully tax-free in India?

No, not for everyone. Government employees get gratuity fully tax-free. Private employees get it tax-free only up to Rs 20 lakh in their lifetime, worked out with the statutory formula. Anything above the exempt amount is taxed as salary income.

How much gratuity is tax-free after 5 years of service?

Five years is the eligibility line, not the tax-free line. Once you qualify, the tax-free amount is the lowest of the gratuity received, the formula amount, and Rs 20 lakh. A person with 5 years of service and a modest salary may get the whole amount tax-free, while a long-service, high-salary employee may cross the ceiling.

How is gratuity calculated for private employees?

For employees covered by the gratuity law, use (last drawn basic + DA) × 15 × completed years of service ÷ 26. A final-year period above 6 months counts as a full year. For employees not covered by the law, use half of the average basic + DA of the last 10 months, multiplied by years of service.

Is gratuity received on retirement taxable in the new regime?

The exemption applies in both regimes. Retirement gratuity up to Rs 20 lakh is exempt for private employees under the new regime too, and fully exempt for government employees. Only the amount above the exemption is taxed, at your slab rate.

Does the Rs 20 lakh gratuity limit apply per employer or in total?

It applies in total, across your whole career. Exemption already claimed with earlier employers eats into the same Rs 20 lakh ceiling. Keep a record of gratuity exemption claimed in past jobs, because your new employer may not know about it.

Can I claim Section 89 relief on taxable gratuity?

Yes. If part of your gratuity is taxable, Section 89(1) relief can cut the extra tax caused by receiving many years of benefit in one year. File Form 10E before filing your income tax return, or the relief may not be allowed.

Official sources

• Income Tax Department — exemptions under Section 10(10) and the Rs 20 lakh ceiling: https://www.incometax.gov.in
• CBDT Notification No. S.O. 1213(E) dated 8 March 2019 (Rs 20 lakh ceiling from 29 March 2018): https://www.incometaxindia.gov.in
• Payment of Gratuity Act / Code on Social Security, 2020 — eligibility and payment rules: https://labour.gov.in

Reviewed by Asuthod Rathod, CA

Last updated: 4 November 2026

Disclaimer: This guide explains the tax rules in plain language for general information. It is not tax advice for your specific case. Tax law and employer policies can differ in edge cases, so check with a qualified tax professional before acting on a large gratuity payout.