Is Gratuity Taxable in India? Section 10(10) Explained [2026]
Is gratuity taxable in India? Mostly no — up to ₹20 lakh is tax-free for private employees. See the 3 exemption tiers, worked examples, and the lifetime ceiling rule.
Short answer: Gratuity is mostly tax-free in India but not entirely. Whether you pay tax on it, and how much, depends on which type of employer you work for and how much you have received in total across your career.
The rules are set out in Section 10(10) of the Income Tax Act, 1961, which divides employees into three categories and gives each a different exemption formula.
The 3-Tier Gratuity Tax Exemption System
| Employee Type | Tax Treatment | Effective Ceiling |
|---|---|---|
| Government employees (Central, State, Defence, Local Bodies) | Fully exempt - no ceiling | Unlimited |
| Private employees covered under the Gratuity Act (employer has 10+ workers) | Exempt up to lowest of 3 amounts (see below) | ₹20 lakh lifetime |
| Private employees NOT covered under the Gratuity Act (employer has than 10 workers) | Exempt up to lowest of 3 amounts (different formula) | ₹20 lakh lifetime |
Tier 1: Government Employees
If you are a central or state government employee, a defense or paramilitary employee, or an employee of a local authority, your entire gratuity is exempt from income tax with no upper ceiling under Section 10(10)(i).
A government employee receiving ₹40 lakh in gratuity pays zero tax on it. There is no cap.
Tier 2: Private Employees Covered Under the Payment of Gratuity Act
Your employer is covered by the act if they employ 10 or more workers on any day in the preceding 12 months.
Your tax-exempt amount is the lowest of these three:
- Actual gratuity received
- ₹20 lakh (lifetime ceiling:see the aggregation rule below)
- Statutory formula amount: (Basic + DA) × 15 × Years of Service ÷ 26
Any gratuity above the exempt amount is added to your taxable income for the year under the head "Income from Salaries."
Worked Example
Anjali, a senior manager at a private firm, retires after 18 years. Last drawn Basic + DA: ₹90,000/month. She has never received gratuity before.
Formula amount: ₹90,000 × 15 × 18 ÷ 26 = ₹9,34,615
Actual received: ₹9,34,615 (employer pays exactly the formula amount)
Ceiling: ₹20 lakh (she has used none of it before)
Lowest of three = ₹9,34,615 → Fully tax-exempt. Anjali pays no tax on her gratuity.
The Ceiling-Breach Example
Deepak retires after 30 years. Basic: ₹1,80,000/month. No DA. No prior gratuity received.
Formula: ₹1,80,000 × 15 × 30 ÷ 26 = ₹31,15,385
Ceiling: ₹20 lakh
Lowest of three = ₹20,00,000 → Tax-exempt
Taxable portion: ₹31,15,385 − ₹20,00,000 = ₹11,15,385 added to income for that year.
If Deepak is in the 30% slab, he pays approximately ₹3,34,615 in income tax on the excess.
Tier 3: Private Employees NOT Covered Under the Gratuity Act
If your employer has fewer than 10 employees and is therefore not covered by the Act, the tax-exempt amount is still the lowest of three but the third item uses a different formula:
- Actual gratuity received
- ₹20 lakh (lifetime ceiling)
- ½ × Average monthly salary (last 10 months) × Completed years of service
"Average salary" here includes basic pay + DA + commission on a fixed percentage of turnover. It excludes HRA, bonuses, and overtime.
This formula is less generous than the Tier 2 formula, so in practice, more of the gratuity may end up taxable for non-Act-covered employees at the same salary level.
The Lifetime Aggregate Rule: The Trap Most People Miss
The ₹20 lakh ceiling is not per job; it is a lifetime aggregate across all employers.
If you received ₹12 lakh in gratuity from your previous employer (tax-free at the time), only ₹8 lakh remains of your lifetime exemption with your next employer.
Example
Vikram received ₹12 lakh tax-free gratuity when he resigned from Company A after 10 years. He joins Company B and retires after another 12 years, receiving ₹14 lakh in gratuity.
Lifetime ceiling used: ₹12 lakh (Company A) Remaining ceiling: ₹20L − ₹12L = ₹8 lakh
Tax-exempt from Company B: ₹8 lakh Taxable from Company B: ₹14L − ₹8L = ₹6 lakh → added to Vikram's taxable income.
Action point: Keep a record of every gratuity payment you receive. When filing your ITR, you must correctly report previously received exempt gratuity to calculate your remaining ceiling.
Death Gratuity: Fully Exempt, No Ceiling
If a government or private sector employee dies during service, the gratuity paid to the nominee or legal heir is completely tax-free , with no upper limit at all. It does not consume any of the ₹20 lakh lifetime ceiling for the recipient.
TDS on Gratuity
Your employer is required to deduct TDS if the gratuity paid to you exceeds the exempt amount. The excess is treated as salary income for TDS purposes. It will appear on your Form 16 under the "Gross Salary" section, with the exempt portion deducted separately.
If you receive gratuity from multiple employers in the same financial year, for example, because you left one job mid-year and received a payout from a second, both amounts are aggregated, and the combined exempt portion cannot exceed ₹20 lakh.
Section 89: Relief
If the taxable portion of your gratuity pushes you into a higher tax slab because it is received as a lump sum, you can claim relief under Section 89 of the Income Tax Act. This spreads the income across multiple years notionally, reducing the slab effect. File Form 10E on the Income Tax portal before filing your ITR to claim this relief.
Quick-Reference Summary
| Situation | Taxable? |
|---|---|
| Govt. employee: any amount | ❌ Not taxable |
| Private employee: amount within ₹20L lifetime ceiling | ❌ Not taxable |
| Private employee: amount above ₹20L lifetime ceiling | ✅ Excess is taxable as salary |
| Death gratuity (nominee receives) | ❌ Not taxable - no ceiling |
| Ex-gratia paid instead of gratuity | ✅ Fully taxable - no exemption |
| Gratuity received from multiple employers in one year | ✅ Taxable above ₹20L aggregate |
Frequently Asked Questions
Is gratuity taxable in India for private employees?
Partly. Gratuity is tax-free up to ₹20 lakh (lifetime aggregate) for private employees. Any amount above this limit is taxed as salary income at your applicable income slab rate. The tax-free amount is the lowest of: actual gratuity received, ₹20 lakh, and the formula-computed amount under Section 10(10)(ii) of the Income Tax Act.
Is gratuity fully exempt for government employees?
Yes, completely. There is no ceiling for central or state government employees. The entire gratuity amount is exempt from income tax under Section 10(10)(i), no matter how large the payout.
Does the ₹20 lakh limit apply per job or per lifetime?
Per lifetime. The ₹20 lakh ceiling applies across your entire career and all employers combined. Gratuity received from previous employers reduces the exemption available from future employers. You must track your cumulative exempt gratuity across all jobs.
Is gratuity taxable in the year it is received?
Yes, if any portion is taxable (above the ₹20 lakh ceiling), it is taxed in the financial year in which it is received, not spread across your years of service. You can claim Section 89 relief by filing Form 10E to reduce the slab rate impact of receiving a large lump sum in a single year.