Is Gratuity Taxable in India? Tax Exemption Guide (2026)
Understanding gratuity taxation under Section 10(10) — who gets full exemption, the ₹20 lakh cap, and how excess is taxed.
Calculate Your Gratuity →Quick Answer
Government employees: Gratuity is fully tax-free. No cap applies.
Private employees (under the Act): Tax-free up to ₹20 lakh. Excess is taxable.
Employees NOT under the Act: Exempt amount is the least of: ₹20L, half-month salary × years, or actual gratuity.
Section 10(10): Gratuity Tax Exemption Rules
The Income Tax Act provides three categories of gratuity exemption under Section 10(10):
Category 1: Government Employees — Section 10(10)(i)
- Applies to central government, state government, and local authority employees
- Fully exempt from income tax
- No monetary cap — the entire gratuity amount is tax-free
Category 2: Employees Covered Under the Act — Section 10(10)(ii)
- Applies to private sector employees in establishments with 10+ employees
- Exempt amount = Least of:
- Actual gratuity received
- 15 days' wages × years of service (wages/26 × 15 × years)
- ₹20,00,000 (twenty lakh rupees)
Category 3: Employees NOT Covered Under the Act — Section 10(10)(iii)
- Applies to employees in establishments with fewer than 10 employees
- Exempt amount = Least of:
- Actual gratuity received
- Half month's salary × completed years of service (salary = average of last 10 months)
- ₹20,00,000 (twenty lakh rupees)
Key difference: For Category 2, the formula uses 15/26 (15 days with 26-day month). For Category 3, it uses half month's salary (15/30), which is slightly less generous.
Government vs Private: Gratuity Tax Comparison
| Factor | Government | Private (Under Act) | Private (Not Under Act) |
|---|---|---|---|
| Tax exemption | Full | Up to ₹20L | Up to ₹20L |
| Formula | N/A | 15/26 × years | ½ month × years |
| Salary basis | N/A | Last drawn | Avg of last 10 months |
| Excess taxed at | N/A | Slab rate | Slab rate |
| Cap cumulative? | N/A | Yes | Yes |
Worked Example: Gratuity Tax Calculation
Scenario: Private sector employee (covered under the Act)
- Last drawn salary (Basic + DA) = ₹1,20,000/month
- Years of service = 20 years
- Actual gratuity received from employer = ₹25,00,000
Step 1: Calculate exempt gratuity
A. Actual gratuity = ₹25,00,000
B. 15/26 formula = (₹1,20,000 ÷ 26) × 15 × 20 = ₹13,84,615
C. ₹20 lakh cap = ₹20,00,000
Exempt = Least of A, B, C = ₹13,84,615
Step 2: Calculate taxable gratuity
Taxable gratuity = ₹25,00,000 − ₹13,84,615 = ₹11,15,385
This amount is added to "Income from Salary" and taxed at your slab rate.
Calculate your scenario: Use our Gratuity Calculator with the cap toggle to see your exact taxable amount.
The ₹20 Lakh Cap is Cumulative (Important!)
Many people miss this: The ₹20 lakh exemption is not per employer — it's cumulative across your entire career. If you received gratuity from a previous employer, it reduces the exemption available from your current employer.
Example
- Gratuity from Employer 1: ₹12,00,000 (fully exempt, under ₹20L)
- Gratuity from Employer 2: ₹15,00,000
- Remaining exemption = ₹20,00,000 − ₹12,00,000 = ₹8,00,000
- Taxable from Employer 2: ₹15,00,000 − ₹8,00,000 = ₹7,00,000
Calculate Your Gratuity & Tax Impact
Free calculator with ₹20 lakh cap toggle, labour code comparison, and CSV export.
Open Gratuity CalculatorFrequently Asked Questions
Is gratuity taxable in India?
It depends. For government employees, gratuity is fully exempt from income tax. For private sector employees covered under the Payment of Gratuity Act, gratuity is exempt up to ₹20 lakh. Any amount exceeding ₹20 lakh is taxable at your slab rate.
What is the tax-free limit for gratuity in 2026?
The tax-free limit for gratuity is ₹20,00,000 (₹20 lakh) as per Section 10(10) of the Income Tax Act. This applies to the total gratuity received during your career (cumulative), not per employer.
Is gratuity tax-free for government employees?
Yes, gratuity received by central government, state government, and local authority employees is fully exempt from income tax under Section 10(10)(i). There is no ₹20 lakh cap for government employees.
How is excess gratuity taxed?
Any gratuity amount exceeding ₹20 lakh is added to your "income from salary" and taxed at your applicable income tax slab rate. If you received gratuity from multiple employers, the ₹20 lakh exemption is cumulative, not per employer.
Is gratuity received on death taxable?
Gratuity received by a nominee or legal heir on the death of an employee is treated as income in the hands of the recipient. However, it is still exempt up to ₹20 lakh under Section 10(10). Additionally, amounts received as death-cum-retirement gratuity may qualify for full exemption under certain conditions.
Do I need to report exempt gratuity in my ITR?
Yes, even though exempt gratuity is not taxable, you should report it in your Income Tax Return under "Exempt Income" in Schedule EI. This ensures transparency and avoids scrutiny from the Income Tax Department.
Is the ₹20 lakh limit per employer or cumulative?
The ₹20 lakh exemption is cumulative across your entire career. If you received ₹12 lakh gratuity from your first employer, you can only claim exemption on ₹8 lakh from your second employer (₹20L − ₹12L = ₹8L).
Related Calculators & Resources
- Gratuity Calculator — Calculate with 15/26 formula and cap toggle
- Gratuity Rules India 2026: Complete Guide — Eligibility, formula, and labour code changes
- Income Tax Calculator
- Salary Calculator
- EPF Calculator
Disclaimer
This article is for informational purposes only. Tax rules are subject to change. Always consult a qualified tax professional before making financial decisions. This website is not affiliated with or endorsed by the Income Tax Department or Government of India.