Gratuity Tax Exemption in India: ₹20 Lakh Limit, Calculation and ITR Reporting

Gratuity is a lump-sum benefit an employer may pay when employment ends because of retirement, resignation, superannuation, death or another qualifying event. The amount an employer must pay and the amount exempt from income tax are separate questions. Some gratuity may be taxable even when the employer is required to pay it.

Tax treatment depends on the employee’s category, the amount received, service period and calculation method. For many non-government employees, the current income-tax exemption ceiling is ₹20 lakh. This is not a blanket deduction of ₹20 lakh for every employee.

Which tax law applies?

The Income-tax Act, 1961 applies to income for FY 2025-26, from 1 April 2025 to 31 March 2026, reported for AY 2026-27. The Income-tax Act, 2025 and Income-tax Rules, 2026 took effect on 1 April 2026. If gratuity is received in Tax Year 2026-27 or later, use the current Act, return utility and portal instructions. Do not rely on an old section number or form without checking.

The Income Tax Department’s current gratuity guidance continues to show a ₹20 lakh exemption ceiling for the relevant non-government employee categories. The calculation and return fields should still be checked for the year in which you receive gratuity.

Who may claim a gratuity exemption?

The exemption generally depends on the type of employee and the gratuity received. Under the 1961 Act, Section 10(10) sets out the principal categories:

These rules generally concern gratuity received on retirement, resignation, termination or death. Gratuity received while you are still employed is generally fully taxable.

A payment made to a nominee or legal heir after an employee’s death can involve different facts and documentation. Check the recipient’s status and the applicable gratuity category rather than assuming that the ordinary retirement calculation settles the tax treatment.

How to calculate the exemption

For a non-government employee covered by the applicable gratuity law, the exempt amount is generally the lowest of:

1. Gratuity actually received;
2. ₹20 lakh, reduced by any earlier gratuity exemption that counts against the limit; or
3. The prescribed service-based amount.

For a monthly-rated employee, the general service-based calculation is:

Last drawn qualifying salary × 15 ÷ 26 × eligible years of service

For this calculation, a service period exceeding six months is generally counted as a full year. A different number of days may apply to an employee of a seasonal establishment. The salary components used in the calculation also matter. The Income Tax Department’s guidance excludes items such as HRA, bonus and overtime from the relevant salary measure for covered employees. Check the applicable definition instead of assuming that gross monthly salary is the right figure.

Example: employee covered by the gratuity law

Suppose an employee has a qualifying last-drawn monthly salary of ₹80,000, eight years and seven months of eligible service, and receives ₹5 lakh as gratuity. For this example, the service period is treated as nine years:

• Service-based amount: ₹80,000 × 15 ÷ 26 × 9 = approximately ₹4,15,385
• Gratuity received: ₹5,00,000
• Exemption ceiling: ₹20,00,000

The lowest amount is approximately ₹4,15,385. On these assumptions, that is the estimated exemption; the balance may be taxable. The actual calculation depends on the applicable salary definition, employment dates and law.

For a non-government employee who is not covered by the applicable gratuity law, the general calculation is:

Half a month’s average salary × completed years of service

Average salary is generally based on the ten months immediately before retirement. The applicable salary definition may include basic pay, qualifying dearness allowance and turnover-based commission. The result is still capped at the gratuity actually received and the ₹20 lakh ceiling. This calculation generally uses completed years of service; do not automatically apply the “part exceeding six months” rule used for the covered-employee calculation.

Example: employee not covered by the gratuity law

Suppose the relevant average monthly salary is ₹60,000, the employee has eight completed years of service and receives ₹4 lakh. Half a month’s salary is ₹30,000. Multiplying ₹30,000 by eight gives ₹2,40,000.

That amount is below both the gratuity received and the ₹20 lakh ceiling. On these assumptions, the estimated exemption is ₹2,40,000, and the remaining amount may be taxable.

These examples are illustrations. Ask the employer to show the calculation and salary components used. The Ministry of Labour and Employment has stated that the revised wage definition under the labour codes applies from 21 November 2025. That definition may affect the employer’s gratuity calculation for a termination on or after that date. The tax exemption is a separate calculation, so check the tax rules applicable to the year of receipt as well.

Does gratuity always require five years of service?

The service condition for receiving gratuity and the income-tax exemption calculation are related but not the same. Under the labour-code framework effective from 21 November 2025, fixed-term employees may qualify for gratuity after one year of continuous service, subject to the applicable rules. Other employees generally need five years, with exceptions such as death or disablement. The entitlement depends on the employee’s category and the law that applies.

Do not treat five years as a universal income-tax threshold. First determine whether gratuity is payable under the employment rules. Then calculate the tax exemption under the income-tax rules applicable to that payment.

What if you received gratuity from more than one employer?

The ₹20 lakh ceiling is not a fresh exemption for every employer. Gratuity received from several employers in the same year, or exempt gratuity received in earlier years, may reduce the limit still available. Keep records of previous gratuity payments and exemptions claimed.

For example, if an employee has already received gratuity from a previous employer and claimed an exemption, the full ₹20 lakh may not be available again. The employer’s calculation should account for relevant earlier exempt amounts where required.

If a gratuity payment is partly taxable, the taxable portion is generally reported as salary income. It is not a separate deduction against salary, interest or other income. The taxable amount can increase your total income and affect the tax payable for that year.

How to report gratuity in your ITR

Check the gratuity amount and exemption shown in Form 16 and the employer’s salary statement. In the applicable return, report the gratuity under salary and claim only the eligible exemption in the salary schedule. Do not enter the full payment as exempt merely because it was paid at retirement.

Your ITR form depends on your other income and eligibility. ITR-1 is available only if all its conditions are met; other taxpayers may need a different form. For FY 2025-26, use the applicable AY 2026-27 return utility. For gratuity received from 1 April 2026, use the utility and instructions for the new tax-law framework.

If TDS was deducted, reconcile it with Form 16 and tax-credit details against your PAN, including Form 26AS and AIS where relevant. Claim the eligible credit in the return. TDS is not always the final tax on the payment, and the employer’s calculation does not replace your return review. If not enough tax was deducted, check whether additional tax payment is required before filing.

If taxable gratuity is paid in arrears and raises your tax for one year, check whether relief is available under the applicable arrears-relief provision. For a payment governed by the 1961 Act, this may involve Section 89 and Form 10E. Follow the rules and forms for the relevant year, especially for payments made from 1 April 2026 onward.

TaxClear’s salaried employee ITR guide covers return-form selection. The online ITR filing guide explains filing and verification.

Documents to keep

Keep these records with your tax papers:

• The employer’s gratuity calculation and payment statement;
• Appointment, service and termination documents showing employment dates;
• Salary slips and evidence of the salary components used;
• Details of gratuity received from previous employers and exemptions claimed;
• Form 16, TDS certificates and tax-credit information; and
• The filed ITR acknowledgement and calculation of any taxable amount.

Supporting documents are normally kept rather than attached to the return. Retain them in case the employer’s exemption differs from your calculation or the tax department asks for supporting information.

Frequently asked questions

Is gratuity up to ₹20 lakh always tax-free?

No. ₹20 lakh is a ceiling for relevant non-government employee categories. The exempt amount may be lower because of the service-based formula, the amount received or earlier gratuity exemptions.

Are government employees fully exempt from gratuity tax?

Gratuity received by specified government employees may be fully exempt. Employees of statutory corporations and public-sector entities should verify their exact status rather than assuming they qualify.

Is gratuity received during employment exempt?

Generally, no. Gratuity received while you are still employed is fully taxable. Do not assume the retirement or termination exemption applies.

Does the new tax regime remove the gratuity exemption?

The gratuity exemption is a specific tax treatment, not a Chapter VI-A deduction. Check the Act and return utility for the year of receipt; do not change tax regimes based only on an assumption that the exemption is unavailable.

Do I need to attach gratuity proof to my ITR?

Supporting documents are normally retained rather than attached to the return. Keep the employer’s calculation and supporting records in case they are requested.