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Gratuity Tax Guide • FY 2025–26

Is Gratuity Taxable in India?

₹ ₹20 Lakh Private Limit
✓ Government: Fully Exempt
3 Least-of-Three Rule
§ Section 89 Relief
Gratuity Tax Snapshot
Private-sector exemption ceiling ₹20 Lakh
Government Employee Fully Exempt
Exemption Method Least of Three
Relief Section 89
Gratuity Tax Explained

How Much of Your Gratuity Do You Actually Keep?

You worked years for that gratuity. Now you want to know how much of it you actually keep.

The short answer: it depends on who you work for and how much you receive. Some of it may be fully tax-free. Some may be taxed as salary. And if you file your ITR without understanding the difference, you could either overpay tax or report the amount incorrectly.

✓
Quick Answer

Gratuity received by eligible government employees is generally fully exempt from tax. For private-sector employees, gratuity may qualify for exemption under Section 10(10), subject to the applicable exemption formula and the ₹20 lakh overall ceiling. Any amount that does not qualify for exemption is generally taxable under Income from Salary.

If you want to estimate the amount based on your salary and years of service before checking the tax treatment, use the gratuity calculator.

Review Note

Last reviewed for FY 2025–26 (AY 2026–27). Tax laws change periodically — consult a CA if your situation involves large gratuity amounts or multiple employers.

Gratuity Basics

What is Gratuity?

Gratuity is a lump sum payment your employer gives you in recognition of long service. Think of it as a formal thank-you for staying loyal to one organization over the years.

You earn it after completing at least five years of continuous service with the same employer. It is not part of your monthly salary. Instead, it is paid when your employment ends under specific qualifying conditions.

When Do You Become Eligible for Gratuity?

01
Retirement or Superannuation

When you reach the official age of retirement.

02
Resignation

After completing five or more years of continuous service.

03
Death or Disability

The five-year service requirement is waived in these cases.

§
Legal Protection

The Payment of Gratuity Act, 1972 makes gratuity mandatory for covered establishments, including qualifying workplaces with 10 or more employees. Before this law, employers could provide gratuity at their own discretion. Today, for covered employees and establishments, gratuity is a statutory employment benefit subject to the applicable rules.

30
Gratuity Payment: 30-Day Rule

One important compliance point: once gratuity becomes due, your employer must pay it within 30 days. If payment is delayed beyond that, the employer may be liable to pay interest on the outstanding amount under the applicable gratuity provisions.

This applies whether you resigned, retired, or an eligible nominee or legal heir is claiming gratuity after the employee's death, subject to the applicable conditions.

Gratuity Tax Treatment

Is Gratuity Taxable in India?

Yes and no. The answer changes based on your employer type and the amount you receive.

What decides your gratuity tax treatment?
01

Your employer type — government or private sector

02

The amount you receive — whether it stays within the applicable exempt limit

03

The reason for payment — retirement, resignation, death, disability, or payment during active service

§
General Tax Rule

Gratuity received while you are still working is generally taxable. Gratuity received on retirement, resignation, death or disability may qualify for exemption under Section 10(10) of the Income Tax Act, subject to the applicable employee category, statutory conditions and exemption limits.

This is also where ITR filing errors can happen. Reporting the wrong taxable amount — or failing to claim an exemption for which you are eligible — can affect your final tax computation. Understanding the applicable gratuity rules before filing makes a real difference.

01

Tax Treatment for Government Employees

If you work for the government, this is generally the simplest category. Gratuity qualifying under Section 10(10)(i) is exempt from tax subject to the applicable statutory provisions.

This category generally includes:

  • Central government employees
  • State government employees
  • Eligible defence personnel
  • Local authority employees covered by the applicable provisions
✓

The tax treatment for government gratuity differs from the exemption formula normally applied to non-government employees. Confirm the correct employment category while reporting the amount in your ITR.

02

Tax Treatment for PSU Employees

Public Sector Undertaking (PSU) employees often ask whether they are automatically treated in the same manner as government employees for gratuity exemption purposes. Generally, they are not.

Unless the applicable service rules place the employee within the relevant government-employee category for tax purposes, PSU gratuity is generally considered under the non-government employee rules. The applicable exemption formula and monetary ceiling must therefore be checked before filing.

If you work for a PSU and are unsure which category applies, confirm the classification with your HR or payroll department before reporting gratuity in your return.

03

Employees Covered Under the Gratuity Law

Many private-sector employees fall under the statutory gratuity framework. Covered establishments generally include qualifying workplaces meeting the applicable employee-strength and coverage conditions.

For non-government employees, gratuity exemption is subject to the applicable statutory ceiling. For the period discussed on this page, the commonly applicable ceiling is ₹20 lakh.

But you do not automatically receive the entire ₹20 lakh as an exemption. Your actual exempt amount is determined by the applicable least-of-three rule, which is explained in the calculation section below.

Common Exemption Ceiling ₹20 Lakh

The actual exemption can be lower depending on the gratuity received and the statutory calculation formula.

04

What About Fixed-Term Employees?

Fixed-term employees are also covered by special gratuity rules. Under the labour-code framework effective from 21 November 2025, completion of five years of continuous service is not required where gratuity becomes payable on expiry of fixed-term employment.

A fixed-term employee completing at least one year under the contract may become eligible for gratuity on completion of the contract, and the gratuity may be calculated on a proportionate basis under the applicable rules.

Apprentices and other excluded categories should be checked separately under the relevant employment law.

i

Because FY 2025–26 includes the transition to the new labour-code framework, the date on which gratuity becomes payable can matter when determining the applicable employment-law rule.

05

Employees Not Covered Under the Statutory Gratuity Formula

Some employees may fall outside the statutory gratuity formula applicable to covered establishments. A tax exemption may still be available, but the calculation method differs.

The main distinction is:

Employee Category Exemption Calculation Basis
Covered under the applicable gratuity law Generally based on 15 days' wages for each eligible year of service under the applicable statutory formula.
Not covered under the statutory formula The income-tax exemption formula generally uses half a month's average salary based on the prescribed preceding period, subject to applicable conditions.

The applicable monetary ceiling must also be considered. The formula used to determine the third figure in the least-of-three test depends on which employee category applies to you.

Retirement-Year Filing

Reporting Gratuity in Your Income Tax Return

If you retired during the year, your return may include salary, pension and retirement benefits together. Make sure the exempt and taxable portions of gratuity are reported correctly. For a broader explanation of return filing after retirement, see our guide to ITR filing for pensioners.

Tax Exemption Rules

Gratuity Exemption Limit Under Section 10(10)

Section 10(10) sets the tax rules for gratuity in India and splits recipients into clear groups.

Here is how the exemption applies to each:

01
Government Employees

100% exempt, no upper limit.

02
PSU Employees

Generally treated as private employees covered under the Act, with exemption up to ₹20 lakh over the lifetime limit.

03
Private Employees Covered Under the Act

Exempt up to ₹20 lakh over the lifetime limit.

04
Private Employees Not Covered Under the Act

Exempt up to ₹20 lakh over the lifetime limit, with a different exemption formula.

05
Nominee or Legal Heir on Employee's Death

100% exempt, no upper limit.

Important ₹20 Lakh

The Limit Is a Lifetime Ceiling

One point that trips up many professionals: the ₹20 lakh limit is a lifetime ceiling, not a per-job limit. If you receive gratuity from more than one employer across your career, the total tax-free amount across all of them cannot cross ₹20 lakh combined.

↔
Changed Jobs During Your Career?

This is especially relevant if you have switched jobs multiple times. Gratuity received from earlier employers may affect the exemption available when gratuity is received again later.

Gratuity Tax Calculation

How to Calculate Taxable Gratuity

Your tax-free gratuity is the least of three amounts. Whichever is lowest becomes your exempt figure. Everything above that is taxable.

The Least-of-Three Rule

Compare these three amounts before deciding how much gratuity qualifies for exemption:

01
Actual Gratuity Received

The amount your employer actually paid you.

02
Statutory Limit

₹20 lakh.

03
Formula Amount

The amount calculated using your salary and eligible years of service.

Exempt Gratuity Lowest of the Three Amounts

Any gratuity received above the applicable exempt amount becomes the taxable portion.

Covered Under the Act

Gratuity Formula for Employees Covered Under the Act

Formula
Gratuity = (15 ÷ 26) × Last Drawn Salary × Years of Service

Salary here means Basic + Dearness Allowance (DA). Any service beyond six months in your final year rounds up to a full year.

6+
Service Rounding Rule

A final period of service exceeding six months is generally counted as one additional completed year for this calculation.

Not Covered Under the Act

Gratuity Formula for Employees Not Covered Under the Act

Formula
Gratuity = ½ × Average Salary of Last 10 Months × Completed Years of Service

Only fully completed years count here. Salary again means Basic + DA.

10
Average Salary Basis

The calculation uses the average salary of the last 10 months and only completed years of service.

Quick Formula Comparison

Calculation Point Covered Under the Act Not Covered Under the Act
Salary basis Last drawn Basic + DA Average Basic + DA of last 10 months
Service factor 15 ÷ 26 for each eligible year Half month's salary for each completed year
Partial year More than six months may round up Only completed years count
Maximum statutory ceiling ₹20 lakh ₹20 lakh
Before You File

Getting these numbers wrong in your ITR is one of the more common mistakes in ITR filing. If you are unsure which formula applies to you, a CA can confirm the correct category and calculation before you file.

Worked Example

Gratuity Calculation Example

Let's put the "least of three" rule to work with a real scenario.

Scenario Rahul Sharma • XYZ Private Limited
Employee Rahul Sharma
Employer XYZ Private Limited Covered under the Act
Service Period 25 Years
Last Drawn Basic + DA ₹60,000 / month
Gratuity Received ₹12,00,000
01
Step 1

Find the Three Amounts

Actual gratuity received ₹12,00,000
Statutory limit ₹20,00,000
Formula amount ₹8,65,385
Calculation
(15 ÷ 26) × ₹60,000 × 25 = ₹8,65,385
02
Step 2

Pick the Lowest Amount

Tax-Exempt Gratuity ₹8,65,385

The lowest of the three amounts is ₹8,65,385. This becomes Rahul's tax-exempt gratuity.

03
Step 3

Find the Taxable Portion

Taxable Gratuity
₹12,00,000 − ₹8,65,385 = ₹3,34,615

Rahul pays tax on ₹3,34,615, which is added to his Income from Salary. The remaining ₹8,65,385 stays tax-free.

Calculation Summary

Rahul's Gratuity Tax Calculation

Particulars Amount
Last drawn monthly (Basic + DA) ₹60,000
Years of service 25
Formula amount: (15 ÷ 26) × ₹60,000 × 25 ₹8,65,385
Statutory limit ₹20,00,000
Actual gratuity received ₹12,00,000
Exempt amount (least of three) ₹8,65,385
Taxable gratuity ₹3,34,615
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Key Takeaway

The ₹20 lakh ceiling does not automatically mean that ₹20 lakh of gratuity is exempt. The exemption is the lowest of the actual gratuity received, the statutory ceiling, and the formula amount.

Resignation & Gratuity Tax

Is Gratuity Taxable on Resignation?

Yes, but the applicable gratuity exemption can still reduce the amount that becomes taxable.

✓
Quick Answer

If you resign after completing five or more years of continuous service, your gratuity can qualify for the applicable exemption under Section 10(10), subject to the relevant employee category and conditions.

01
Exemption Calculation

The Least-of-Three Rule Still Applies

The "least of three" rule applies in the same way as explained above. Only the portion of gratuity that exceeds your eligible exempt amount becomes taxable as salary income.

Gratuity Received
−
Eligible Exemption
=
Taxable Gratuity
02
Important Exception

Gratuity Paid While You Are Still Working

There is one important situation to watch. If your employer pays gratuity while you are still actively working — without resignation, retirement, death or disability triggering the payment — the amount does not receive the normal retirement or termination gratuity exemption merely because it is called "gratuity".

The tax treatment therefore depends on the nature and timing of the payment. The exemption under Section 10(10) is linked to qualifying gratuity received on the applicable employment event.

!
Check Why the Gratuity Was Paid

Before claiming an exemption, confirm that the payment was made on a qualifying event such as retirement, resignation, death or disability and that the applicable Section 10(10) conditions are satisfied.

03
ITR Reporting

What If Gratuity Was Reported Incorrectly?

If your gratuity was not reported correctly in a previous return, review the exempt and taxable portions carefully along with the information reported by your employer.

You may also find our guide on salaried employee income tax notices useful for understanding what to check if a mismatch or tax notice relates to your salary or retirement benefits.

✓
Key Takeaway

Resigning does not automatically make your entire gratuity taxable. If the applicable gratuity conditions are satisfied, the eligible exemption is calculated first and only the remaining taxable portion is included in salary income.

Death & Disability

Is Gratuity Taxable on Death or Disability?

The rules are more favourable when gratuity becomes payable because of an employee's death or qualifying disablement.

01
Five-Year Rule Is Waived

Gratuity can become payable on death or qualifying disablement even if the employee has not completed five years of continuous service.

02
Nominee or Eligible Legal Heir Receives It

The gratuity is normally paid to the valid nominee or eligible legal heir in accordance with the applicable gratuity rules.

03
Tax Exemption Depends on Employee Category

Government death-cum-retirement gratuity qualifying under Section 10(10)(i) is fully exempt. For non-government employees, the applicable Section 10(10) exemption formula and ceiling must be checked.

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Government vs Private-Sector Gratuity

For eligible government employees, qualifying death-cum-retirement gratuity is fully exempt. For private-sector and other non-government cases, do not assume that the entire payment is automatically exempt; apply the relevant Section 10(10) rules.

Naming a nominee is therefore important. Employees covered by the applicable gratuity rules should complete the required nomination process so their family does not face avoidable delays when a claim becomes necessary.

Multiple Employers

Is Gratuity Taxable When Received from Two Employers in One Year?

This situation can arise when you change jobs and receive gratuity from more than one employer within the same financial year.

The applicable exemption ceiling is considered on an aggregate basis. You do not receive a fresh ₹20 lakh exemption simply because the gratuity came from a different employer.

Example
Employer A ₹9 Lakh
+
Employer B ₹9 Lakh
=
Combined Gratuity ₹18 Lakh

The exemption for each gratuity payment must still be worked out under the applicable formula, while the overall statutory ceiling is applied cumulatively.

If you already received exempt gratuity from an earlier employer in a previous year, that earlier exempt amount can reduce the remaining ceiling available for later gratuity.

Delayed Payment

Is Interest on Delayed Gratuity Taxable?

The gratuity principal and interest paid because of a delay should be treated as separate amounts for tax purposes.

Your gratuity principal continues to follow the normal Section 10(10) exemption rules. Interest received because the payment was delayed is generally taxable separately, and its correct income head should be determined from the facts of the payment.

Gratuity Principal Section 10(10) Rules Apply
Delay Interest Consider Separately for Tax
Lifetime Exemption

Gratuity from Multiple Employers

If you switch jobs across your career, the gratuity exemption ceiling does not restart with each employer. Earlier exempt gratuity can affect the exemption available on a later payout.

First job ₹6 lakh exempt
Second job ₹8 lakh exempt
Total exemption already used ₹14 lakh
Remaining room within ₹20 lakh ceiling ₹6 lakh
i
Keep Earlier Gratuity Records

Maintain details of gratuity received and exemptions claimed from previous employers. These records can become important when calculating the exemption on a later gratuity payment.

Income Tax Return

How to Show Gratuity in ITR

Report the exempt and taxable portions separately so the gratuity treatment in your return matches the underlying calculation and employer records.

Exempt Portion Exempt Income

Report the eligible exempt gratuity in the exempt-income field or schedule applicable to the ITR form you are filing.

Taxable Portion Income from Salary

Any gratuity amount that does not qualify for exemption is generally included under salary income.

Your employer's salary and TDS records may also reflect the gratuity treatment. Compare the amount actually received with the salary breakup and tax information available in your Form 16 ( Now Form 130 ) and other tax records.

If the employer-reported amount does not match your own records, resolve the discrepancy before filing wherever possible.

To understand how employer TDS interacts with taxable salary income, see our detailed guide on TDS on salary in India.

The correct ITR form depends on your complete income profile, not gratuity alone. Incorrectly omitting exempt gratuity or classifying a taxable amount in the wrong place can create inconsistencies in your return.

Tax Relief

Section 89 Relief on Gratuity

A taxable gratuity can increase your taxable salary sharply in the year of receipt, even though the benefit relates to several years of service.

Section 89(1) can provide relief on gratuity that exceeds the exemption available under Section 10(10)(ii) or Section 10(10)(iii), subject to the prescribed conditions and calculation rules.

Taxable Gratuity
→
Check Section 89 Eligibility
→
File Required Form & Claim Relief
✓
Form 10E

Where Section 89 relief is claimed under the existing Income-tax Act framework, file Form 10E electronically in accordance with the applicable requirements before claiming the relief in your return.

If a significant part of your gratuity is taxable, calculate the Section 89 relief before finalising the return rather than assuming the full taxable amount must bear tax at the year's marginal rate without adjustment.

Retirement Benefits

Gratuity vs Other Retirement Benefits

Gratuity is only one component of the benefits you may receive when employment ends. Each retirement payment has its own tax rules.

PF
Provident Fund (PF)

PF withdrawal can qualify for favourable tax treatment when the applicable continuous-service and other conditions are satisfied. Employee and employer contributions build the account during employment.

PEN
Pension

Pension tax treatment depends on whether the pension is commuted or uncommuted and on the recipient and employment category. Do not assume that every pension payment has identical tax treatment.

LE
Leave Encashment

Leave encashment has separate exemption rules under Section 10(10AA). Government and non-government employees can have different exemption treatment.

Final Filing Point

Gratuity, pension, PF withdrawals and leave encashment should not be grouped together without checking their individual tax treatment. Review each retirement benefit separately before completing the salary, exempt-income and other relevant parts of your ITR.

Common Questions

Frequently Asked Questions

Quick answers to common questions about gratuity exemption, taxable gratuity, ITR reporting and retirement-related tax rules.

01 Is gratuity taxable in India for private employees?

Partly. Private-sector employees can qualify for gratuity exemption under Section 10(10), subject to the applicable formula, employee category and the ₹20 lakh statutory ceiling. Any portion that does not qualify for exemption is generally taxable under Income from Salary.

02 Is gratuity fully tax-free for government employees?

Qualifying death-cum-retirement gratuity received by eligible Central Government, State Government and local-authority employees is fully exempt under Section 10(10)(i), subject to the applicable statutory provisions.

03 What is the gratuity exemption limit in India?

For eligible non-government employees, the commonly applicable statutory ceiling is ₹20 lakh. The actual exemption can be lower because the applicable least-of-three rule must also be applied. Qualifying government gratuity follows a different exemption rule.

04 How is taxable gratuity calculated?

For eligible non-government gratuity, the exempt amount is generally the lowest of the applicable three figures: the actual gratuity received, the statutory ceiling, and the gratuity amount calculated under the prescribed formula. Any balance above the eligible exempt amount is taxable.

05 Is the ₹20 lakh limit per job or per lifetime?

It is an aggregate ceiling, not a fresh ₹20 lakh allowance for every employer. Exempt gratuity received from previous employers can reduce the remaining ceiling available when gratuity is received again later.

06 Is gratuity taxable if I receive it while still working?

A payment described as gratuity does not automatically qualify for Section 10(10) exemption merely because the employer calls it gratuity. The nature of the payment and the qualifying employment event must satisfy the applicable exemption rules.

07 Is gratuity paid to a nominee after death taxable?

The tax treatment depends on the employee category and the applicable gratuity exemption provision. Qualifying government death-cum-retirement gratuity may be fully exempt, while non-government gratuity should be checked under the applicable Section 10(10) exemption rules and limits. Do not assume every private-sector death gratuity is automatically exempt without limit.

08 Does gratuity get taxed under the new tax regime?

The availability of gratuity exemption under Section 10(10) is not removed merely because an eligible taxpayer uses the new tax regime. The applicable employee category, formula, conditions and exemption ceiling still need to be checked.

09 Can I claim Section 89 relief on taxable gratuity?

Section 89(1) relief may be available for eligible taxable gratuity subject to the prescribed conditions and calculation rules. Under the existing Income-tax Act framework, the required Form 10E should be filed electronically in accordance with the applicable requirements before claiming the relief in the return.

10 Where do I report gratuity in my ITR?

Report the eligible exempt gratuity in the exempt-income field or schedule applicable to your ITR form. Any portion that is taxable is generally included under Income from Salary. The exact reporting field can depend on the ITR form and filing-year utility.

11 Is interest on delayed gratuity taxable?

Interest received because gratuity was paid late should be considered separately from the gratuity principal. The principal continues to follow the applicable Section 10(10) rules, while the interest component must be examined separately for tax reporting based on the facts of the payment.

12 What if I receive gratuity from two employers in the same year?

Calculate the applicable exemption for each payment while also considering gratuity exemptions already received. The statutory ceiling does not restart for each employer. Earlier exempt gratuity can reduce the balance available against later gratuity receipts.

13 Is PSU employee gratuity fully exempt?

Not automatically. Employment with a PSU does not by itself guarantee the unlimited government-employee gratuity exemption. The employee's legal status, service rules and applicable tax provision should be checked. Many PSU employees fall under the non-government gratuity exemption framework.

14 Is gratuity shown in Form 16 ( Now Form 130 )?

Employer salary and tax records should reflect the relevant gratuity treatment where applicable. Check the salary breakup, exemption details and taxable amount in your Form 16 ( Now Form 130 ) and related tax records. If the figures do not match the gratuity actually received, clarify the difference with your employer before filing.

15 Can my employer withhold gratuity?

Gratuity may be forfeited wholly or partly only in limited circumstances permitted by the applicable gratuity law, such as specified misconduct or loss caused to the employer. Outside those statutory situations, an employer cannot arbitrarily deny gratuity that has lawfully become payable.

CA-Assisted ITR Filing

Get Your Gratuity Taxed Correctly — Without Guesswork

Gratuity taxation has several moving parts: your employee category, the "least of three" rule, the lifetime cap, ITR reporting, Form 10E, and potentially Section 89 relief. Miss any one of these and you could overpay tax or create inconsistencies in your return.

At Easy Return, our CA-led team handles exactly this. We calculate your exempt and taxable gratuity, consider eligible deductions and reliefs, and help file your ITR correctly — including exempt-income reporting and Section 89 relief where applicable.

✓ Exempt & taxable gratuity calculation
✓ ITR reporting support
✓ Form 10E & Section 89 guidance where applicable
✓ CA-led filing assistance
CA Sagar Batra - Chartered Accountant
Written & Reviewed By

CA Sagar Batra

ICAI Registered Chartered Accountant · 10+ Years of Professional Experience · 12,000+ Tax Filings

Chartered Accountant with experience in taxation, compliance and business advisory. His work covers Income Tax, GST, TDS, tax notices, business compliance and financial documentation for individuals and businesses across India.

✓ Income Tax ✓ GST ✓ TDS ✓ Tax Notices ✓ Business Compliance
✓ Content reviewed for tax accuracy, practical relevance and compliance context.