Yes, gratuity is taxable in India, but Section 10(10) of the Income Tax Act, 1961 exempts a substantial portion of it, and in many cases the entire amount ends up tax-free. Government employees pay no tax on gratuity at all. Private sector employees can exempt up to ₹20,00,000 across their lifetime, with the exact figure set by a formula tied to salary, years of service, and whether the employer falls under the Payment of Gratuity Act, 1972. Anything above the exempt amount is added to your salary income and taxed at your slab rate.
Government Employees Pay No Tax on Gratuity
If you work for the Central Government, a State Government, or a local authority, your entire gratuity is exempt under Section 10(10)(i). There is no formula and no ceiling.1Indian Kanoon. The Income Tax Act, 1961 – Section 10(10) The same treatment applies to defence services personnel receiving retiring gratuity under the applicable Pension Code. You still report the amount when filing your return, but you claim the whole figure as exempt, so it adds nothing to your taxable income.
Private Sector, Employer Covered by the Payment of Gratuity Act
If your employer is covered by the Payment of Gratuity Act, the tax-exempt portion is the lowest of these three amounts:2Income Tax India. Threshold Limits Under Income-Tax Act
- The actual gratuity your employer paid you.
- ₹20,00,000, the statutory ceiling on tax-free gratuity.
- The formula amount: 15 days’ salary for every completed year of service, with any part of the final year exceeding six months rounded up to a full year.
Whatever exceeds the lowest of those three is fully taxable as salary income.
How the Formula Works
Salary for this formula means only basic pay and dearness allowance. It does not include HRA, bonuses, overtime, commissions, or other perquisites.2Income Tax India. Threshold Limits Under Income-Tax Act The Act treats a month as 26 working days, so “15 days’ salary” is your monthly basic-plus-DA divided by 26 and multiplied by 15.3India Code. The Payment of Gratuity Act, 1972
For years of service, a final year running past six months rounds up to a full year. So 20 years and 8 months counts as 21 years, but 20 years and 4 months counts as 20.
Worked Example
Mr. A retires after 20 years and 8 months. His last drawn basic-plus-DA is ₹1,00,000 per month, and his employer pays ₹15,00,000 as gratuity.
Service rounds up to 21 years. The formula gives (₹1,00,000 ÷ 26) × 15 × 21 = ₹12,11,538. Comparing ₹15,00,000 (actual), ₹20,00,000 (cap), and ₹12,11,538 (formula), the lowest is ₹12,11,538. That is exempt. The remaining ₹2,88,462 is added to Mr. A’s income and taxed at his slab rate.
Private Sector, Employer Not Covered by the Act
Some smaller employers, and those otherwise outside the Act’s scope, still pay gratuity voluntarily or under contract. For their employees, a different version of Section 10(10) applies. The exempt amount is again the lowest of three figures:1Indian Kanoon. The Income Tax Act, 1961 – Section 10(10)
- The actual gratuity received.
- ₹20,00,000.
- The formula amount: half a month’s average salary for each completed year of service.
Two things change compared with covered employees. Only fully completed years count; there is no rounding up for a part-year over six months.1Indian Kanoon. The Income Tax Act, 1961 – Section 10(10) And “salary” here includes basic pay, dearness allowance, and commission calculated as a fixed percentage of turnover, averaged over the ten months immediately preceding the month you leave.2Income Tax India. Threshold Limits Under Income-Tax Act A raise or cut in your final months affects the exempt figure directly.
Worked Example
Ms. B retires after 20 years and 8 months from an employer outside the Act. Her average salary over the last ten months is ₹95,000, and she receives ₹15,00,000 as gratuity.
Only 20 completed years count. The formula gives (₹95,000 ÷ 2) × 20 = ₹9,50,000. Comparing ₹15,00,000, ₹20,00,000, and ₹9,50,000, the exempt amount is ₹9,50,000. The remaining ₹5,50,000 is taxable. Even with similar service and salary, Ms. B pays substantially more tax than Mr. A because her employer sits outside the Act.
The ₹20 Lakh Cap Is a Lifetime Limit
This one catches people out. The ₹20,00,000 ceiling is not renewed with each employer. It is an aggregate lifetime limit across every employer you have ever worked for.1Indian Kanoon. The Income Tax Act, 1961 – Section 10(10) If a previous employer paid you ₹10,00,000 as tax-free gratuity, only ₹10,00,000 of exemption capacity remains for any future gratuity you receive. The same rule applies if two employers pay you gratuity in the same financial year: the combined exemption cannot exceed ₹20,00,000.
The onus of tracking that running total sits with you, not with your current employer. If your Form 16 shows an exemption you were not entitled to because you had already used it up, the mismatch can surface later as a notice from the Income Tax Department.
Gratuity Received While Still Employed
Section 10(10) exempts gratuity paid on the end of employment — retirement, resignation, superannuation, death, or disability. Any amount labeled “gratuity” or “ex gratia” that you receive while still working for the same employer is fully taxable at your slab rate, with no exemption available under this section.1Indian Kanoon. The Income Tax Act, 1961 – Section 10(10)
When an Employer Can Forfeit Gratuity
Completing five years does not guarantee payment. The Payment of Gratuity Act permits an employer to withhold gratuity, wholly or in part, in specific situations.3India Code. The Payment of Gratuity Act, 1972 Full forfeiture is allowed where services are terminated for riotous or disorderly conduct, an act of violence during employment, or an offence involving moral turpitude committed during the course of employment and established through a proper inquiry. Partial forfeiture is allowed to the extent of loss where an employee has caused damage to the employer’s property through willful negligence.
Section 10(10) Under the New Tax Regime
The new tax regime, which became the default from the 2023-24 financial year, removes most deductions and exemptions. The gratuity exemption under Section 10(10) is not one of them. It continues to apply in full under both regimes, with the same formulas, the same lifetime cap, and the same eligibility rules. You do not need to opt for the old regime to claim it.
How to Report It in Your Return
Your employer usually calculates the exempt portion and adjusts TDS accordingly before releasing the payment. Form 16 shows the total gratuity, the exempt amount, and the TDS deducted. When you file your income tax return, the full gratuity goes under “Income from Salaries,” and the exempt portion is claimed separately in the schedule for income exempt under Section 10. The sub-clause you cite — 10(10)(i), (ii), or (iii) — depends on your employment category: government, covered private, or non-covered private.
Hold on to the gratuity calculation statement and Form 16 in case the exemption is questioned. If you have received gratuity from an earlier employer, work out your remaining lifetime exemption capacity before you file, because your current employer will not have that history. The taxable portion, whatever it works out to, is added to your other income and taxed at the slab rates of whichever regime you have chosen for the year.