How is gratuity taxed: the ₹20 lakh lifetime exemption, when it becomes taxable, and TDS

For informational purposes only. Gratuity taxation rules are under Section 10(10) of the Income Tax Act, 1961. Verify current rules at incometax.gov.in. Consult a practising CA for your specific situation.

Gratuity is one of the most tax-efficient payouts a salaried employee receives. Most employees — especially those with less than 10–15 years of service — will find their entire gratuity is tax-free. But the exemption has a ceiling (₹20 lakh), and the calculation differs depending on whether your employer is covered under the Payment of Gratuity Act.

This guide shows exactly how the exemption is calculated, when gratuity becomes taxable, and what your employer should do for TDS.

Note: For the gratuity formula and eligibility rules (how much you receive, the 5-year rule, what counts as basic salary), see the companion article: [Gratuity calculation — formula, eligibility, and the 5-year rule](/salary/gratuity-calculation-formula-eligibility-india).

The ₹20 lakh exemption: Section 10(10)

Section 10(10) of the Income Tax Act exempts gratuity from income tax — up to a limit. The limit and the calculation method depend on which category your employer falls into.

Category 1: Employers covered under the Payment of Gratuity Act

For most private-sector companies with 10 or more employees, the employer is covered under the Act.

Exempt gratuity = minimum of:

The smallest of these three is exempt. The rest is taxable as salary income in the year of receipt.

In practice: For most private-sector employees, the actual gratuity received equals the formula amount (because employers calculate using the same formula). So Condition 1 and Condition 2 are typically the same number, and the question is simply whether that amount exceeds ₹20 lakh.

Example — fully exempt:

Priya worked 12 years at a covered employer. Final basic: ₹60,000/month.

Gratuity received: ₹60,000 × 15 × 12 / 26 = ₹4,15,385

• Condition 1: ₹4,15,385 (actual)
• Condition 2: ₹4,15,385 (formula)
• Condition 3: ₹20,00,000

Minimum = ₹4,15,385. Fully exempt. Tax: ₹0.

Example — partially taxable:

Vikram worked 25 years at a covered employer. Final basic: ₹2,00,000/month.

Gratuity received: ₹2,00,000 × 15 × 25 / 26 = ₹28,84,615

• Condition 1: ₹28,84,615 (actual)
• Condition 2: ₹28,84,615 (formula)
• Condition 3: ₹20,00,000

Minimum = ₹20,00,000. Exempt amount: ₹20,00,000. Taxable amount: ₹28,84,615 − ₹20,00,000 = ₹8,84,615.

Vikram adds ₹8,84,615 to his income in the year of receipt and pays tax at his applicable slab rate.

Category 2: Employers NOT covered under the Payment of Gratuity Act

Smaller employers (under 10 employees) or those in specific sectors not covered by the Act may still pay gratuity voluntarily.

Exempt gratuity = minimum of:

- "Average salary" = average of last 10 months' salary (basic + DA + commission on sales, if any)

- "Completed years" = only fully completed years (no rounding up for months)

Note the difference: the formula uses ½ month (not 15/26), and uses average salary over 10 months rather than last drawn salary.

Gratuity received on death: fully exempt

If gratuity is received by a nominee or legal heir due to the employee's death, the entire amount is exempt from tax — with no ₹20 lakh ceiling. Death gratuity is unconditionally tax-free.

The lifetime limit: ₹20 lakh across all employers

The ₹20 lakh exemption is a lifetime limit, not a per-employer limit.

If you receive gratuity from multiple employers over your career (which is common with job changes after completing 5+ years each time), the total exempt gratuity across all employers combined cannot exceed ₹20 lakh in your lifetime.

Example:

Meera receives ₹9 lakh gratuity from Company A (after 8 years) and ₹14 lakh from Company B (after 10 years). Total received: ₹23 lakh.

Lifetime exemption used at Company A: ₹9 lakh.

Remaining exemption at Company B: ₹20 lakh − ₹9 lakh = ₹11 lakh.

Taxable gratuity at Company B: ₹14 lakh − ₹11 lakh = ₹3 lakh (added to income in the year of receipt).

What your employer does for TDS on gratuity

If any part of your gratuity is taxable (above the ₹20 lakh lifetime limit), your employer must deduct TDS on the taxable portion under Section 192 (TDS on salary), since gratuity is treated as salary for TDS purposes.

You declare the previous gratuity received (from prior employers) to your current employer so they can correctly calculate the remaining exemption. This information goes into your final settlement calculations.

The taxable gratuity is included in your Form 16 Part B under "Gross Salary" and the exemption is shown separately.

◇ Quick check: If you are receiving gratuity after a long career and have received gratuity from previous employers, track the cumulative exempt amount used. Once you have used ₹20 lakh in lifetime exemption, all future gratuity from any employer is fully taxable.

How gratuity is reported in your ITR

Gratuity appears in your ITR as follows:

• Total gratuity received: reported under Gross Salary (Schedule S)
• Exempt portion: claimed under Exemptions under Section 10 (specifically Section 10(10))
• Taxable portion: included in total income

Your Form 16 Part B from your employer should correctly compute and show both figures. Verify these figures match your actual gratuity letter and the exemption calculation.

⚠ Common mistake: assuming all gratuity is always tax-free

Many employees assume gratuity is always exempt. It is exempt up to ₹20 lakh lifetime — not always entirely. Employees who:

• Work at high basic salaries for 20+ years
• Receive gratuity from multiple employers during their career
• Receive an "ex-gratia" or contractual gratuity above the Act formula (some employers pay more)

...may find a portion of their gratuity is taxable. The portion above the exempt limit is taxable in the year of receipt, at your slab rate.

Bottom line

• Gratuity is tax-exempt under Section 10(10) — up to the minimum of: (a) actual gratuity received, (b) formula-based gratuity, and (c) ₹20 lakh lifetime limit
• For most employees (under 20–25 years of service at a high basic), the entire gratuity is below ₹20 lakh and is fully tax-free
• The ₹20 lakh limit is a lifetime limit across all employers — track it if you receive gratuity from multiple employers
• Gratuity received on death is fully exempt with no ceiling
• Taxable gratuity (above the exempt limit) is added to salary income in the year of receipt and taxed at your slab rate

Frequently asked questions

Q: My employer paid me ₹15 lakh in gratuity but my calculated formula gives ₹12 lakh. Is the excess taxable?

A: Yes. The exempt amount is the minimum of actual received and the formula. Since you received ₹15 lakh but the formula gives ₹12 lakh, the exempt amount is ₹12 lakh (still well below the ₹20L ceiling). The excess ₹3 lakh is taxable as salary income.

Q: I received gratuity 10 years ago of ₹5 lakh. I have just received ₹18 lakh in gratuity from my current employer. How much is exempt?

A: Lifetime exemption available = ₹20 lakh. Used at previous employer = ₹5 lakh. Remaining = ₹15 lakh. Since your current gratuity is ₹18 lakh, exempt amount is ₹15 lakh. Taxable amount: ₹3 lakh.

Q: Is gratuity received from a startup (less than 10 employees) tax-free?

A: The ₹20 lakh exemption applies regardless of whether the employer is covered under the Payment of Gratuity Act. The calculation method differs (Category 2 formula) but the maximum exemption of ₹20 lakh still applies. So yes, up to the exempt amount, it is tax-free.

Q: I am in the 30% tax bracket. How much will I pay on ₹5 lakh of taxable gratuity?

A: ₹5 lakh × 30% = ₹1.5 lakh, plus 4% cess = ₹1.56 lakh. This assumes your total income puts you squarely in the 30% bracket and the gratuity pushes income further into the same bracket (rather than crossing a slab boundary mid-way).

Sources: Section 10(10), Income Tax Act — Income Tax Department · Gratuity tax exemption, ClearTax

Last verified: May 2026. The ₹20 lakh lifetime limit has been in effect since 2019; verify any changes at incometax.gov.in.