Gratuity is tax-free up to a limit, and the limit depends on who your employer is. A Central or State Government employee pays no tax on retirement gratuity at all. A private-sector employee gets an exemption equal to the lowest of three figures: the gratuity actually received, a formula amount based on salary and years of service, and ₹20 lakh. Anything above that lowest figure is taxed as salary in the year you receive it.
The rules have moved to a new home. An amount received up to 31 March 2026 (FY 2025-26, AY 2026-27) is governed by section 10(10) of the Income-tax Act, 1961. From 1 April 2026 (tax year 2026-27 onwards), the rule sits in section 19 of the Income-tax Act, 2025. It appears there as serial numbers 3 to 6 of the Table of deductions from salaries. The arithmetic is largely the same, but the section numbers, the forms and one open question about the new Labour Codes are not. The position below is as on 4 November 2026.
Which provision covers your gratuity
Start by placing yourself in the right row. The exemption is decided by the type of employer and the law under which gratuity is paid, not by your salary level.
| Who receives the gratuity | Income-tax Act, 1961 (received up to 31 March 2026) | Income-tax Act, 2025 (received from 1 April 2026) | How much is exempt |
|---|---|---|---|
| Central or State Government employee, or local authority employee, under pension rules | Section 10(10)(i) | Section 19, Table serial 3, read with sub-section (2)(g) | Entire amount |
| Defence services personnel under the Pension Code or Regulations | Section 10(10)(i) | Section 19, Table serial 4 | Entire amount |
| Private employee covered by the Payment of Gratuity Act, 1972 | Section 10(10)(ii) | Section 19, Table serial 5 | Amount computed under section 4(2) and (3) of that Act |
| Any other employee (not covered, or gratuity paid under the employer's own scheme) | Section 10(10)(iii) | Section 19, Table serial 6 | Lowest of actual gratuity, half a month's average salary per completed year, and the notified limit |
Employees of statutory corporations are not "Government employees" for this purpose. The Income Tax Department's tutorial on taxability of retirement benefits makes that exclusion expressly, so an employee of a corporation set up under its own statute, such as the Life Insurance Corporation of India, computes the exemption like a private employee.
Two more points apply to every row. A payout taken while you are still in service (for example, an interim payout without leaving the job) is fully taxable. The exemption is also available in both tax regimes. For those in the new regime, section 202(2)(a)(iv) of the 2025 Act withdraws only serial 1 of the section 19 Table (tax on employment, that is, professional tax). The gratuity serials are left untouched.
Employees covered by the Payment of Gratuity Act: the 15/26 formula
For a covered employee, the exempt amount is the lowest of three figures.
- 15/26 × last drawn monthly salary × completed years of service, counting any part of a year above six months as a full year;
- ₹20,00,000;
- the gratuity actually received.
The 15/26 reflects 15 days' wages for each year, with a month taken as 26 working days. In a seasonal establishment the multiplier is 7 days instead of 15. "Salary" here is last drawn basic pay plus dearness allowance. Bonus, commission, house rent allowance, overtime and other allowances and perquisites are left out.
The ₹20 lakh ceiling comes from the Labour Ministry's notification S.O. 1420(E) dated 29 March 2018, which raised the cap from ₹10 lakh. The department's FAQ on the effective date of the ₹20 lakh gratuity limit confirms this and records that the same ₹20 lakh applies to non-covered employees through Notification S.O. 1213(E) dated 8 March 2019.
Illustration 1: retirement in October 2025
Meera worked for a private manufacturer with about 200 employees and retired on 31 October 2025 after 27 years and 8 months. Her last drawn basic pay plus DA was ₹1,10,000 a month. The employer paid gratuity of ₹19,00,000 under its enhanced policy. The figures are an illustration.
- Service counts as 28 years, because 8 months is more than six months.
- Formula amount: 15/26 × ₹1,10,000 × 28 = ₹17,76,923.
- Ceiling: ₹20,00,000.
- Actual gratuity: ₹19,00,000.
The lowest is ₹17,76,923, so that much is exempt under section 10(10)(ii) of the 1961 Act. The balance of ₹1,23,077 is taxable salary for FY 2025-26. Her employer should have deducted tax on it, and it will appear as taxable salary in her Form 16.
Employees not covered: half a month's average salary
Some employers are outside the gratuity law, for instance a shop or office with fewer than ten employees that still pays gratuity under its own policy. Their employees get the exemption under serial 6 of section 19, which is the lowest of three figures.
- the gratuity actually received;
- the amount notified by the Central Government (₹20 lakh, carried forward as explained below);
- half a month's average salary for each completed year of service.
Two differences from the covered formula catch people out. First, only completed years count. There is no rounding up for a part year, so 11 years and 9 months is 11 years. Second, the salary base is an average of the ten months immediately before the month in which retirement, incapacity or termination happens. Sub-section (2)(b) of section 19 defines salary for serial 6 to include dearness allowance only if the terms of employment provide for it, and to exclude all other allowances and perquisites.
Serial 6 is not limited to retirement. It also covers gratuity received on becoming incapacitated before retirement and on termination of employment, which includes resignation.
Illustration 2: resignation in September 2026
Arjun worked for a seven-person consultancy and resigned with effect from 30 September 2026 after 11 years and 9 months. The firm pays gratuity under its own written policy and paid him ₹6,00,000. His basic pay plus DA (DA forms part of his terms) averaged ₹84,000 a month over November 2025 to August 2026, the ten months before September.
- Completed years: 11.
- Half a month's average salary × years: ₹42,000 × 11 = ₹4,62,000.
- Actual gratuity: ₹6,00,000.
- Notified limit: ₹20,00,000.
Exempt: ₹4,62,000 under section 19, serial 6 of the 2025 Act. Taxable: ₹1,38,000, added to his salary for tax year 2026-27.
The ₹20 lakh limit is a lifetime limit, not a per-employer limit
Sub-section (2)(a) of section 19 caps the serial 6 deduction at A minus B. A is the notified limit. B is the total gratuity already allowed as exempt or deductible in earlier tax years, from any employer. Amounts from more than one employer in the same tax year are also aggregated before the cap is applied.
Illustration 3: second gratuity in tax year 2026-27
Ravi received gratuity from his first employer in FY 2021-22, and ₹9,00,000 of it was exempt. In December 2026 he leaves his second employer, a firm outside the gratuity law. He has 15 completed years there and a ten-month average salary of ₹1,80,000, so the half-month formula gives ₹90,000 × 15 = ₹13,50,000. He receives ₹14,00,000.
- Remaining limit: ₹20,00,000 − ₹9,00,000 = ₹11,00,000.
- Exempt: lowest of ₹14,00,000, ₹13,50,000 and ₹11,00,000 = ₹11,00,000.
- Taxable: ₹3,00,000.
Employers do not know what you claimed years ago unless you tell them. If you have taken an exemption before, give the new employer the figure so that TDS is computed on the right base, and keep the old Form 16 on file.
Why the 1961 notifications still apply under the 2025 Act
Serial 6 refers to "the amount specified by the Central Government, by notification". No fresh figure is needed for the ₹20 lakh to continue. Section 536(2)(j) of the Income-tax Act, 2025 treats any notification, rule or circular issued under the repealed 1961 Act as issued under the corresponding provision of the new Act. That holds so far as it is not inconsistent with the new Act. The 2019 notification therefore carries over to serial 6 until it is replaced.
The same section keeps the 1961 Act alive for earlier years. Assessment, rectification and appeal for FY 2025-26 and earlier continue under the old Act, so a gratuity received in March 2026 is still claimed and defended under section 10(10).
The Labour Code question for covered employees
This part changes the answer for many private-sector employees paid after November 2025. According to the Government's press release of 21 November 2025, the four Labour Codes came into force on that date. The Code on Social Security, 2020 subsumed the Payment of Gratuity Act, 1972. It changed two things that matter here.
- Wages for gratuity: the Labour Ministry's additional FAQs on the Labour Codes (as on 16 March 2026) state that gratuity based on the revised definition of wages applies from 21 November 2025. Under that definition, if excluded allowances exceed 50% of total remuneration, the excess is added back to wages. An employee whose allowances exceed half of total pay can therefore receive more gratuity than before.
- Fixed-term employees: they become eligible for gratuity after one year of service under the contract, instead of five years.
The tax text has not moved with it. Serial 5 of section 19 still restricts the exemption to "the amount calculated as per the provisions of section 4(2) and (3)" of the Payment of Gratuity Act, 1972. In July 2026 the American Chamber of Commerce in India asked CBDT to align the gratuity exemption with the Code, pointing to the continuing references to the repealed Act and the different treatment of similarly placed employees.
Until CBDT clarifies, keep two things apart when you compute the tax on a gratuity paid on or after 21 November 2025:
- The gratuity payable is now worked out under the Code, on the wider wage base.
- The exempt amount, on the plain text of serial 5, is still the 15/26 computation on last drawn basic pay plus DA, capped at ₹20 lakh.
Any extra gratuity produced by the wider wage base is then taxable, unless a clarification or amendment says otherwise. If the excess is significant, it is reasonable for an employer to ask whether serial 6 can be applied instead, but that is an interpretation still to be settled. Record the basis you used in the TDS working.
Spreading the tax on the taxable part
The taxable excess is a lump sum for years of past service, so it can push you into a higher slab in the year of receipt. Relief is available by recomputing the tax as if the amount had been spread over the earlier years.
- For gratuity received in FY 2025-26 or earlier, claim relief under section 89 of the 1961 Act through Form 10E on the e-filing portal. Its Annexure II and IIA deal with gratuity for past services. The portal says Form 10E is mandatory to claim the relief, and that if you claim it in the return without filing the form, the return is processed without the relief.
- For gratuity received from tax year 2026-27, the relief sits in section 157(1) of the 2025 Act and is claimed in Form 39 under Rule 73 of the Income-tax Rules, 2026. The department's FAQs on Form 39 list "gratuity for past services" among the receipts it covers.
File the relief form before the return, and match the figures with the Form 16 your employer issues for the year of receipt.
Checklist before you accept the employer's figure
- Confirm which row of the table you fall in, and whether the employer counts as a Government employer or a statutory corporation.
- Note the date gratuity was received. It decides whether section 10(10) of the 1961 Act or section 19 of the 2025 Act applies.
- Check the length of service: covered employees round up a part year above six months; others count completed years only.
- Check the salary base: last drawn basic plus DA for covered employees; the ten-month average, with DA only if the terms provide for it, for others.
- Reduce the ₹20 lakh by any gratuity exempted in earlier years before applying it.
- For payments on or after 21 November 2025 to covered employees, separate the Code-based gratuity from the tax exemption computation.
- If a taxable portion remains, file Form 10E or Form 39 before the return to claim relief on the lump sum.
Also check the Form 16 for the year of receipt. The exempt gratuity should appear against the right provision and the taxable balance should be inside gross salary.
