Gratuity received from an employer on retirement, resignation, death, or disablement is exempt from tax up to specified limits under Section 10(10). This exemption continues to be available in the New Regime. Gratuity is a statutory benefit under the Payment of Gratuity Act, 1972 for eligible employees.
Exemption Limits
- Government employees: Entire gratuity is fully exempt (no limit)
- Non-government employees covered under Payment of Gratuity Act: Least of (i) actual gratuity received, (ii) 15 days' salary × years of service, (iii) ₹20,00,000
- Non-government employees NOT covered under the Act: Least of (i) actual gratuity, (ii) half month's average salary × years of service, (iii) ₹20,00,000
- Gratuity received on death or disablement is fully exempt irrespective of the limit
Eligibility Conditions
- Must have completed 5 years of continuous service (except in case of death/disablement)
- Payable on retirement, resignation, death, or disablement
- Applicable to employees in factories, mines, oilfields, plantations, ports, railways, shops, and other establishments
Calculation (Non-Govt, covered under Act)
- Formula: (Last drawn salary × 15 × number of completed years of service) ÷ 26
- "Salary" = Basic + Dearness Allowance
- Example: Basic ₹50,000/month × 15 × 20 years ÷ 26 = ₹5,76,923 exempt
- Any gratuity beyond the exempt limit is taxable as salary
This guide reflects FY 2025-26 (AY 2026-27) and is for general information. Tax rules and limits change, and how they apply depends on your circumstances. It is not professional tax advice; consult a qualified Chartered Accountant before acting.
