Gratuity Tax Exemption in India 2026
Is Gratuity Taxable? ₹20 Lakh Limit Explained
Gratuity is tax-exempt up to ₹20 lakh for private sector employees under Section 10(10) of the Income Tax Act. Government employees enjoy full exemption. This guide covers all three employee categories, the least of three rule, and real calculation examples.
Quick Answer — Is Gratuity Taxable in India?
🏛️
Government Employees
Fully Tax-Free
No monetary limit
🏢
Private (Covered by Act)
Tax-Free up to ₹20 Lakh
Balance above ₹20L is taxable
👤
Private (Not Covered)
Least of 3 Rule
Max ₹20L — least of 3 amounts
📖 Section 10(10) — Income Tax Act Gratuity Exemption
Section 10(10) of the Income Tax Act 1961 provides tax exemption on gratuity received by an employee. It divides employees into three categories — each with different exemption rules.
Government Employees
Central Govt, State Govt, Local Authority, Defence
Any gratuity received by a government employee is completely tax-free with no upper monetary limit. Whether the payout is ₹5 lakh or ₹50 lakh — zero tax.
Private Employees — Covered Under Payment of Gratuity Act
Establishments with 10+ employees — most private companies
Tax-exempt up to ₹20,00,000 (₹20 lakh). Amount received above ₹20 lakh is added to salary income and taxed at your applicable slab.
Tax-Free Amount = MIN(Actual Gratuity, ₹20,00,000)
Taxable Amount = MAX(0, Actual Gratuity − ₹20,00,000)
Private Employees — NOT Covered Under the Act
Establishments with fewer than 10 employees or exempt industries
Exempt amount = LEAST of these three:
Actual gratuity received
Whatever was paid by employer
½ × Average monthly salary × Completed years
Average salary = last 10 months avg. Years = completed full years only (no rounding up)
₹20,00,000 statutory limit
Hard cap regardless of calculation
Tax-Free = MIN(A, B, C)
Taxable = Actual Gratuity − Tax-Free Amount
Least of 3 Rule — Step-by-Step Worked Example
Example: Employee NOT covered under Gratuity Act
Last drawn Basic + DA
₹40,000/month
Average salary (last 10 months)
₹38,000/month
Years of completed service
12 years
Actual Gratuity Received
₹2,76,923
Employer
Small firm — not covered by Act
A — Actual Gratuity Received
As received from employer
₹2,76,923
B — Half Month Avg Salary × Years
½ × ₹38,000 × 12 = ₹19,000 × 12
₹2,28,000
C — Statutory Limit
Fixed cap under Section 10(10)
₹20,00,000
Result — Least of A, B, C
Tax-Free Amount
₹2,28,000
(B is lowest)
Actual Gratuity
₹2,76,923
Taxable Amount
₹48,923
(added to salary)
Gratuity Tax Calculation — Private Employees Covered Under Act
Most private company employees fall in this category. Exemption = MIN(Actual Gratuity, ₹20 lakh).
| Annual CTC | Basic/month | Years | Gratuity Amount | Tax-Free | Taxable | Status |
|---|---|---|---|---|---|---|
| ₹6,00,000 | ₹25,000 | 5 yrs | ₹72,115 | ₹72,115 | ₹0 | Fully Tax-Free ✅ |
| ₹12,00,000 | ₹50,000 | 15 yrs | ₹4,32,692 | ₹4,32,692 | ₹0 | Fully Tax-Free ✅ |
| ₹15,00,000 | ₹62,500 | 20 yrs | ₹7,21,154 | ₹7,21,154 | ₹0 | Fully Tax-Free ✅ |
| ₹24,00,000 | ₹1,00,000 | 22 yrs | ₹25,38,462 | ₹20,00,000 | ₹5,38,462 | Partially Taxable |
| ₹30,00,000 | ₹1,25,000 | 25 yrs | ₹36,05,769 | ₹20,00,000 | ₹16,05,769 | Partially Taxable |
💡 For most employees in India, gratuity stays well below ₹20 lakh — making it completely tax-free. You only face tax if you have a very high Basic salary and very long tenure (typically 20+ years at senior levels).
⚠️ Important: ₹20 Lakh Is a Lifetime Limit — Across All Employers
The ₹20 lakh exemption under Section 10(10) is a cumulative lifetime limit — not per employer. If you receive gratuity from multiple employers during your career, all amounts are counted together.
Example — Multiple Employer Scenario
Special Cases — Tax Treatment
Gratuity received on Death of Employee
Fully Tax-Free — No limitGratuity paid to the nominee or legal heir of a deceased employee is fully exempt from income tax under Section 10(10). No monetary ceiling applies.
Gratuity received on Permanent Disablement
Fully Tax-Free — No limitGratuity received due to accident or disease leading to permanent total disablement is also fully exempt from tax — same as death case.
Gratuity received on Voluntary Retirement (VRS)
Standard exemption applies — up to ₹20LVRS gratuity follows the standard Section 10(10) rules. However, the VRS compensation itself may have a separate exemption under Section 10(10C) — consult a CA for combined planning.
Gratuity above ₹20 Lakh
Taxable as Salary IncomeThe amount exceeding ₹20 lakh is added to your gross salary for that year and taxed at your applicable income tax slab rate (5%, 20%, or 30%). Advance tax may be needed.
📝 How to Show Gratuity in Your Income Tax Return (ITR)
Collect Form 16 from employer
Your employer must reflect gratuity in your Form 16 under the salary head. The exempt portion should be shown separately under Section 10(10).
Report in ITR under Salary Income
In ITR-1 or ITR-2, go to Salary Schedule. Enter gross salary including gratuity. Under "Exempt Allowances u/s 10", add gratuity exemption under Section 10(10).
Only taxable portion adds to total income
The exempt amount is deducted from gross salary before computing total income. Only the taxable portion (above ₹20L or above least-of-3) adds to your taxable salary.
Maintain records for multiple employers
If you have received gratuity from earlier employers, keep records of amounts received and exemptions claimed. The cumulative ₹20L lifetime cap requires tracking across all years.
⚠️ Disclaimer: Tax rules change and individual cases vary. This guide is for general understanding. Consult a Chartered Accountant for your specific ITR filing, especially if gratuity exceeds ₹20 lakh or if you have received gratuity from multiple employers.
Calculate your gratuity payout instantly
Enter Basic salary and years — get exact gratuity amount and check if it exceeds ₹20L tax limit.
Frequently Asked Questions
Is gratuity taxable in India?▼
Gratuity is partially or fully tax-exempt under Section 10(10) of the Income Tax Act. Government employees — fully exempt with no limit. Private employees covered under the Gratuity Act — exempt up to ₹20 lakh. Private employees not covered — exempt up to the least of: actual gratuity, half-month average salary × years, or ₹20 lakh. Amounts above the exempt limit are taxed as salary income.
What is the gratuity tax exemption limit in 2026?▼
The tax-free exemption limit for gratuity is ₹20,00,000 (₹20 lakh) for private sector employees under Section 10(10). This limit was raised from ₹10 lakh to ₹20 lakh in 2018. It has not changed under the new Labour Code 2025. Government employees have no monetary limit — their gratuity is fully exempt.
What is the least of 3 rule for gratuity tax?▼
For private employees NOT covered under the Gratuity Act, the tax-exempt amount is the LEAST of: (A) actual gratuity received, (B) half × average monthly salary × completed years of service, (C) ₹20 lakh. The lowest of A, B, or C is tax-free. The remaining amount is taxable as salary income.
Is gratuity received on death or disability taxable?▼
No. Gratuity received on death of the employee (paid to nominee) or due to permanent disablement is completely tax-free under Section 10(10) — no monetary limit applies. This is an unconditional full exemption regardless of the amount.
Can I claim gratuity tax exemption from multiple employers?▼
Yes, but the total lifetime exemption across all employers is capped at ₹20 lakh. For example, if you claimed ₹8 lakh exemption from Employer A and later receive ₹15 lakh gratuity from Employer B — only ₹12 lakh (₹20L − ₹8L) is exempt from Employer B. The remaining ₹3 lakh is taxable.