Gratuity Tax Exemption: Rs 20 Lakh Limit and Formula

Gratuity is tax-free up to the least of three amounts: the gratuity you receive, Rs 20 lakh, and a formula of 15/26 of last salary for each year of service. Government employees get it fully exempt.

Below: who gets gratuity, the two formulas, worked examples and a ready reckoner, how the taxable part is taxed, and what the labour codes changed.

What Gratuity Is

Gratuity is a lump sum an employer pays when an employee leaves after long service. It is separate from monthly salary and from the provident fund.

It is paid on retirement, resignation, death or disablement. The Payment of Gratuity Act, 1972 set the rules, and the Code on Social Security, 2020 has since taken them over.

Calculate your gratuity

Enter basic plus DA and years of service to see the amount before you check the tax.

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Who Gets Gratuity

An employee gets gratuity after five years of continuous service with the same employer, except on death or disablement. Permanent and temporary staff both qualify, and apprentices do not.

Five years of service: needed on retirement, superannuation or resignation.

No minimum on death or disablement: the five-year rule does not apply to these two events.

Covered establishments: factories, mines, oilfields, plantations, ports, railways, shops and other establishments with 10 or more employees on any day of the last 12 months.

Once covered, always covered: the Act keeps applying even if headcount later falls below 10.

What the New Labour Codes Changed for Gratuity

The labour codes changed gratuity mainly for fixed-term staff, who can now claim it after one year of service. The Code on Social Security, 2020 came into force on 21 November 2025.

Other employees still need five years, and the Rs 20 lakh ceiling continues, per the sources checked. Read the Code on the Ministry of Labour and Employment site.

How Much Gratuity Is Tax-Free

For a private sector employee, the tax-free gratuity is the least of three amounts, and the Rs 20 lakh ceiling applies to gratuity paid on or after 29 March 2018. The ceiling was Rs 10 lakh before that.

Tax treatment of gratuity under Section 10(10)
Employee	Tax-free amount
Central or state government	Fully exempt, no limit
Private, covered by the Act	Least of three: 15/26 formula, Rs 20 lakh, amount received
Private, not covered by the Act	Least of three: half-month formula, Rs 20 lakh, amount received

The exemption is available under both the old and the new tax regime. Treat the Rs 20 lakh ceiling as a total across employers and years, since exempt gratuity claimed earlier counts towards it.

Formula if the Payment of Gratuity Act Covers You

If the Act covers you, the formula is last drawn salary times 15, divided by 26, times years of service. Salary here means basic plus dearness allowance.

Gratuity = Last salary (basic + DA) x 15 / 26 x Years of service

The 15 stands for 15 days of wages for each year, and 26 is the working days in a month. A part year over six months counts as a full year.

Formula if the Act Does Not Cover You

If the Act does not cover you, the formula is half the average salary of the last 10 months, times completed years of service. An employer can still pay gratuity to such employees.

Gratuity = Average salary, last 10 months x 1 / 2 x Completed years

Only completed years count under this formula, so a part year is dropped and not rounded up.

Worked Examples of Exempt and Taxable Gratuity

Work out the formula amount, then take the least of it, Rs 20 lakh and the amount received. The balance of the amount received is taxable.

Note the salary

Take the last drawn basic plus dearness allowance for one month.

Count the years

Count completed years of service and round a part year over six months up, if the Act covers you.

Apply the formula

Use 15/26 if the Act covers you, or half the 10-month average if it does not.

Take the least

Compare the formula amount with Rs 20 lakh and the gratuity you received, and take the lowest.

Find the taxable part

Subtract the exempt amount from the gratuity received. The balance is taxed as salary.

Four worked examples
Case	Formula amount	Received	Exempt	Taxable
Covered, Rs 1,00,000 salary, 19 years 7 months (20 years)	Rs 11,53,846	Rs 11,00,000	Rs 11,00,000	Rs 0
Covered, Rs 1,50,000 salary, 30 years	Rs 25,96,154	Rs 26,00,000	Rs 20,00,000	Rs 6,00,000
Not covered, Rs 90,000 average, 25 years 2 months	Rs 11,25,000	Rs 11,00,000	Rs 11,00,000	Rs 0
Covered, Rs 60,000 salary, 12 years 4 months	Rs 4,15,385	Rs 3,00,000	Rs 3,00,000	Rs 0

In the second case the Rs 20 lakh ceiling is the least, so Rs 6,00,000 is taxable. In the fourth case the employer paid less than the formula, so the amount received is the least.

Gratuity by Salary and Years of Service

For an employee covered by the Act, the 15/26 formula gives the amounts below, before the Rs 20 lakh ceiling. A figure above Rs 20 lakh is tax-free only up to Rs 20 lakh.

Formula amount for a covered employee (salary is basic plus DA a month)
Monthly salary	5 years	10 years	20 years	30 years
Rs 30,000	Rs 86,538	Rs 1,73,077	Rs 3,46,154	Rs 5,19,231
Rs 50,000	Rs 1,44,231	Rs 2,88,462	Rs 5,76,923	Rs 8,65,385
Rs 1,00,000	Rs 2,88,462	Rs 5,76,923	Rs 11,53,846	Rs 17,30,769
Rs 1,50,000	Rs 4,32,692	Rs 8,65,385	Rs 17,30,769	Rs 25,96,154
Rs 2,00,000	Rs 5,76,923	Rs 11,53,846	Rs 23,07,692	Rs 34,61,538

The ceiling bites at 30 years of service once salary passes about Rs 1,15,556, and at 20 years once it passes about Rs 1,73,333. Use the Gratuity Calculator for your own figures.

How the Taxable Part of Gratuity Is Taxed

Any gratuity above the exempt amount is added to your salary income for the year and taxed at your slab rate. It is not taxed at a separate flat rate.

That can push you into a higher slab in your retirement year, so time other income with care. The Income Tax Calculator shows the effect, and the Leave Encashment Tax Calculator covers the other retirement payment.

When the Employer Must Pay Gratuity

The employer must pay gratuity within 30 days of it becoming payable. If it pays late, simple interest is due on the amount until it is paid.

Ask in writing if the date passes, and keep the proof of your service dates and last drawn salary. The Section 10 exemptions guide covers the other salary exemptions, including leave encashment.

Gratuity Under the Income-tax Act, 2025

The Rs 20 lakh gratuity exemption continues under the Income-tax Act, 2025, which applies from 1 April 2026, but the section number has changed. The sources checked show the same ceiling and formulas.

Confirm the exact section on incometaxindia.gov.in before you cite it in a return. Gratuity received in FY 2025-26 still falls under the 1961 Act.

Frequently Asked Questions: Gratuity Tax Exemption

What is gratuity?

Gratuity is a lump sum an employer pays when an employee leaves after long service. It was set by the Payment of Gratuity Act, 1972, now folded into the Code on Social Security, 2020.

Is gratuity taxable?

Only above the exempt limit. The exempt part is the least of the gratuity received, Rs 20 lakh and the formula amount, and the rest is taxed as salary at your slab rate.

What is the tax-free limit on gratuity?

The limit is Rs 20 lakh for gratuity paid on or after 29 March 2018, up from Rs 10 lakh. It caps the exempt amount, so any gratuity above it is taxable.

Is gratuity fully exempt for government employees?

Yes. Gratuity paid to central and state government employees on retirement or death is fully exempt, with no Rs 20 lakh limit. The limit matters for private sector employees.

Who is eligible for gratuity?

An employee with five years of continuous service with the same employer, except on death or disablement. Fixed-term employees qualify after one year under the new Code. Apprentices are excluded.

What is the gratuity formula for employees covered by the Act?

Last drawn salary divided by 26, times 15, times years of service. At Rs 1,00,000 and 20 years it is Rs 11,53,846. A part year over six months counts as a full year.

What is the formula when the Act does not cover you?

Half the average salary of the last 10 months, times completed years of service. At Rs 90,000 and 25 years it is Rs 11,25,000. Only completed years count here.

Which salary is used to calculate gratuity?

Last drawn basic salary plus dearness allowance. Bonus, HRA, overtime and other allowances are left out, so a higher CTC does not raise gratuity by itself.

How is the length of service rounded?

For employees covered by the Act, a part year over six months counts as a full year, so 19 years 7 months becomes 20. For others only completed years count, so 25 years 2 months stays 25.

Is gratuity exempt in the new tax regime?

Yes. The gratuity exemption is one of the few allowed in both regimes, with the same Rs 20 lakh ceiling. Choose a regime on your other deductions, not on gratuity.

What happens to gratuity above Rs 20 lakh?

The amount above the exempt limit is added to your salary income for the year and taxed at your slab rate. Plan the year with the Income Tax Calculator before you retire.

Is the Rs 20 lakh limit for each employer or a lifetime limit?

Treat it as a total across employers and years, since exempt gratuity claimed earlier counts towards the ceiling. Check your past claims before you retire.

How soon must the employer pay gratuity?

Within 30 days of it becoming payable. If the employer delays, simple interest is due on the amount until it is paid, so ask in writing if the date passes.

Did the new labour codes change gratuity?

The Code on Social Security, 2020 came into force on 21 November 2025. It lets fixed-term employees claim gratuity after one year, and the five-year rule continues for the rest.

Has the Income-tax Act, 2025 changed the gratuity exemption?

The sources checked show the same Rs 20 lakh ceiling, but section numbers changed from 1 April 2026. Confirm the reference on incometaxindia.gov.in before you cite it in a return.

How do I calculate my gratuity quickly?

Enter last drawn basic plus DA and years of service in the Gratuity Calculator. It applies the 15/26 formula and shows the amount, and you can then check the tax-free part.

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Disclaimer: Limits and formulas follow Section 10(10) of the Income Tax Act, 1961 and the Payment of Gratuity Act, 1972. Labour code and 2025 Act points come from secondary sources, so confirm them on incometaxindia.gov.in. This page is general information and not tax advice.

Gratuity Tax Exemption: Rs 20 Lakh Limit, Formula, Eligibility and Worked Examples