Quick answer
Gratuity up to ₹20 lakh is tax-free for private-sector employees. That ₹20 lakh is a lifetime limit across all employers, not a per-job limit. Government employees get gratuity fully exempt, with no ceiling at all. The exemption applies in both the old and the new tax regime, because it is an exemption, not a deduction like 80C.
| Who you are | Tax-free gratuity | What it depends on |
|---|---|---|
| Government employee (central, state, local authority) | Fully exempt, no ceiling | Nothing else — the whole amount is exempt |
| Private employee, covered by gratuity law | Least of: actual gratuity, ₹20 lakh, 15/26 formula amount | Basic + DA, years of service |
| Private employee, not covered by gratuity law | Least of: actual gratuity, ₹20 lakh, half of average salary × years | Average salary of last 10 months, years of service |
If your gratuity is more than the tax-free amount, only the excess is added to your salary income and taxed at your slab rate.
What is gratuity?
Gratuity is a lump-sum payment your employer gives you for long service. It is paid when you retire, resign, or when service ends because of death or disablement. You do not contribute anything toward it — the employer pays the whole amount.
Eligibility: you must have 5 years of continuous service with the same employer. If you die or become permanently disabled, the 5-year rule does not apply, and your nominee or family still gets gratuity. Note: for private-sector employees the ₹20 lakh tax exemption cap still applies to death gratuity — only the service rule is waived.
The 4 years + 240 days rule: courts have held in several cases that an employee who completes 4 years and 240 days of continuous service can count as having completed 5 years. This is a court view, not a written rule in the law, so do not count on it. Ask HR how your employer treats it.
The three categories, and how each is taxed
1. Government employees — fully exempt
Gratuity received by central government, state government and local-authority employees is fully exempt from tax. There is no ₹20 lakh ceiling on the tax exemption.
One point that causes confusion: central government service rules cap the gratuity payment itself at ₹25 lakh (from 1 January 2024). That is a payment cap under service rules, not a tax cap. Whatever gratuity a government employee is paid is fully exempt from income tax.
2. Covered employees — the 15/26 formula
Most private-sector employees fall in this group. Your employer is “covered” if the establishment has 10 or more employees (once covered, it stays covered even if staff strength later falls below 10).
Your tax-free gratuity is the least of these three:
- The actual gratuity you receive
- ₹20,00,000 (lifetime ceiling across all employers)
- The formula amount: (15 ÷ 26) × (basic salary + dearness allowance) × completed years of service
Points that matter in the formula:
- Salary means basic + DA only. HRA, bonus, commission and other allowances do not count, unless a fixed commission forms part of your salary under the rules.
- 26 stands for the working days in a month. 15 stands for 15 days’ wages for each year of service.
- A part-year of more than 6 months counts as a full year. So 7 years and 8 months is treated as 8 years. A part-year below 6 months is ignored.
- Seasonal employees are calculated differently: 7 days’ wages for each season worked.
Gratuity also shows up in your CTC. Employers budget for it at 4.81% of basic + DA per year (that is 15 ÷ 26 ÷ 12). That is a budgeting number for the company. It does not change the formula or the tax treatment.
3. Not-covered employees — the half-salary formula
If your employer is not covered by the gratuity law (usually a small firm with fewer than 10 employees), your tax-free gratuity is the least of these three:
- The actual gratuity you receive
- ₹20,00,000 (lifetime ceiling across all employers)
- Half of your average salary × completed years of service, where average salary means the average of your salary (basic + DA + fixed commission, if any) over the last 10 months before retirement or resignation
Note the difference: covered employees use the 15/26 formula on the last drawn salary; not-covered employees use half of the 10-month average salary. The ₹20 lakh ceiling is the same for both.
Worked examples with exact maths
Example A — Covered employee, modest salary
Basic + DA = ₹60,000 per month. Service = 12 years.
Formula amount = (15 ÷ 26) × 60,000 × 12 = ₹4,15,385 (60,000 × 15 = 9,00,000; ÷ 26 = 34,615.38; × 12 = 4,15,384.62, rounded to ₹4,15,385).
The amount is below the ₹20 lakh ceiling, so the whole ₹4,15,385 is tax-free. Taxable: ₹0.
Example B — Covered employee, high salary
Basic + DA = ₹2,00,000 per month. Service = 22 years.
Formula amount = (15 ÷ 26) × 2,00,000 × 22 = ₹25,38,462 (2,00,000 × 15 = 30,00,000; ÷ 26 = 1,15,384.62; × 22 = 25,38,461.54, rounded to ₹25,38,462).
Tax-free: ₹20,00,000 (the ceiling). Taxable as salary: ₹5,38,462. (The taxable part is taxed with your salary income — see TDS on Salary: Section 192 (Now Section 392) for how salary TDS works.)
Example C — Not-covered employee
Average salary of the last 10 months = ₹80,000 per month. Service = 18 years.
Half-average amount = 0.5 × 80,000 × 18 = ₹7,20,000.
If the actual gratuity paid is ₹7,20,000, the tax-free amount is ₹7,20,000 (the least of ₹7,20,000, ₹20 lakh and ₹7,20,000). Taxable: ₹0.
Example D — The lifetime limit across two jobs
Job 1: gratuity ₹8,00,000, fully exempt. Job 2: gratuity ₹14,00,000.
Total received across your career: ₹22,00,000. Lifetime ceiling: ₹20,00,000. So from the second job, only ₹12,00,000 is exempt (₹8,00,000 + ₹12,00,000 = ₹20,00,000). The remaining ₹2,00,000 is taxable as salary.
This is the mistake that costs people money: they treat ₹20 lakh as a per-job limit. It is not. Keep a record of gratuity exemption already claimed with earlier employers.
What changed, and what stayed the same
What changed: the new Labour Code
The Code on Social Security, 2020 replaced the Payment of Gratuity Act, 1972. It came into force on 21 November 2025 (Notification S.O. 5319(E)). Gratuity now sits in Section 53 of the Code.
| What | Before 21 Nov 2025 | After 21 Nov 2025 |
|---|---|---|
| Governing law | Payment of Gratuity Act, 1972 | Code on Social Security, 2020 (Section 53) |
| Fixed-term employees | Same 5-year rule as everyone else | Pro-rata gratuity after 1 year of service |
| Wages definition | Often just basic + DA as structured | Basic + DA and similar components must be at least 50% of total pay, which can raise the gratuity base |
| Wage and dues settlement | No fixed statutory deadline | Within 2 working days of exit |
| Formula, 5-year rule, ₹20 lakh tax ceiling | As above | Unchanged |
The wider wages definition is the change that can actually raise your gratuity. If your pay was heavy on allowances and light on basic, a restructure that lifts basic toward 50% of total pay also lifts the base on which gratuity is calculated.
What stayed the same
- The 15/26 formula
- The 5-year eligibility rule for regular employees
- The ₹20 lakh lifetime tax-free ceiling for private employees
- Full exemption for government employees
- Payment within 30 days of becoming payable, with 10% per annum simple interest on delay
- Gratuity on death or disablement, with the 5-year rule waived
The tax law side
For FY 2025-26 (AY 2026-27), the exemption is Section 10(10) of the Income-tax Act, 1961. From Tax Year 2026-27 (FY 2026-27), the Income-tax Act, 2025 applies, and the gratuity exemption sits in the schedule of exempt retirement benefits in the new Act. The ₹20 lakh ceiling and the full exemption for government employees are unchanged. No new section number was created for gratuity.
Common confusions, cleared
Leave encashment is not gratuity. Cashing out earned leave at retirement has its own tax-free limit of ₹25 lakh (lifetime, for private employees, from 1 April 2023). It is a different benefit with different rules.
VRS compensation is not gratuity. Compensation received on voluntary retirement has its own exemption of up to ₹5 lakh under a separate provision. It does not affect your gratuity tax.
Gratuity while still in service is fully taxable. If you receive a gratuity payment while you are still employed — not on retirement, resignation, death or disablement — the whole amount is taxable. The exemption applies only at the end of service.
Practical impact: what to do when gratuity is due
- Check the calculation yourself. Get the exact basic + DA figures from your salary slip. Count completed years, rounding up if the final part-year is over 6 months. Apply the formula and compare it with HR’s number. Do not use CTC or gross salary in the formula — only basic + DA.
- Ask for payment within 30 days of your last working day. If the employer delays, simple interest at 10% per annum is payable from the date gratuity became due. If the employer refuses to pay, claims can be filed through the Ministry of Labour’s SAMADHAN portal.
- Know the forfeiture rules. Gratuity can be forfeited wholly or partly only when service is terminated for an act involving moral turpitude, violence, or riotous or disorderly conduct — and only after due process, with a chance to defend yourself. Dismissal for poor performance does not justify forfeiture.
- Report it correctly in your ITR. Show the full amount received under salary, and the exempt part in the exempt-income schedule of your return. Even if the whole amount is exempt, report it — do not leave it out. See our step-by-step guide to filing ITR online if you have not filed before.
- Use relief under Section 89(1) if part of it is taxable. If a chunk of gratuity is taxable (like Example B above), filing Form 10E lets you claim relief that can lower the tax for the year of receipt.
- Keep the documents. Keep the gratuity statement, the full-and-final settlement, salary slips and the resignation or retirement letter. They are your proof if the tax department asks.
Frequently asked questions (FAQ)
Is gratuity taxable in India?
Only the part above the tax-free limit is taxable. For private employees, gratuity up to ₹20 lakh over your whole career is exempt; anything above that is added to salary income and taxed at your slab rate. Government employees pay no tax on gratuity at all.
How much gratuity is tax-free?
For private-sector employees, up to ₹20 lakh across your entire working life, across all employers. If you already claimed exemption on gratuity from an earlier job, what remains is ₹20 lakh minus what you already claimed. Government employees have no ceiling.
What is the gratuity calculation formula?
For covered employees: (15 ÷ 26) × (basic salary + dearness allowance) × completed years of service. A part-year of more than 6 months in the final year counts as a full year. For not-covered employees, the formula uses half of the average salary of the last 10 months × completed years instead.
What is the minimum service required for gratuity?
You need 5 years of continuous service with the same employer. The rule is waived if you die or become permanently disabled — your nominee or family still gets gratuity. Fixed-term employees qualify for pro-rata gratuity after 1 year under the new Labour Code.
What happens if I resign before 5 years?
You are generally not entitled to statutory gratuity. Some employers still pay an ex-gratia amount out of goodwill, but that payment is fully taxable — it is not tax-free gratuity. The 4 years + 240 days court view is about reaching the 5-year mark, not about a reduced payout.
Is gratuity fully tax-free for government employees?
Yes. Gratuity received by central government, state government and local-authority employees is fully exempt, with no ceiling on the tax exemption. Central government service rules cap the payment itself at ₹25 lakh, but the amount paid is fully exempt from tax.
Can gratuity be forfeited?
Only for proven serious misconduct — an act involving moral turpitude, violence, or riotous or disorderly conduct — and only after a fair inquiry with a chance to defend yourself. It cannot be forfeited for poor performance or because the employer is unhappy with your resignation.
How soon must gratuity be paid?
Within 30 days of your last working day. Delay attracts 10% per annum simple interest from the due date until payment.
Official sources
- Income Tax e-Filing portal — incometax.gov.in
- Income-tax Act, 2025 — full text on India Code
- Ministry of Labour & Employment — labour.gov.in
Reviewed by Asuthod Rathod, CA
Last updated: 17 October 2026
Disclaimer: This article explains tax rules in simple language for general information. Tax laws change, and your exact situation may differ. Check the official portals above or speak to a qualified tax professional before acting on any specific case.
Editorial byline for eircicai income tax guides — covering the Income Tax Act, 2025, section renumbering, regime comparison, and deductions. Content is reviewed by Asuthod Rathod, CA.