Gratuity Tax: Exempt Up to ₹20 Lakh (Lifetime)
Gratuity received at retirement or resignation can be partly or fully tax-free. For employees covered under the Payment of Gratuity Act, the exempt amount is the lowest of: (1) actual gratuity received, (2) ₹20 lakh (lifetime limit), or (3) amount as per the formula (15/26 × last drawn salary × years of service). Government employees get full exemption. For private-sector employees, understanding these rules helps you estimate take-home and plan tax. This guide explains gratuity tax exemption simply: who gets what, formula, and when tax applies.
Key Takeaways
- Act-covered employees: Exempt = lowest of actual, ₹20L, or formula amount
- Formula: 15/26 × (last basic + DA) × completed years. Part year >6 months = full year
- Government employees: Full exemption. No limit
- Excess taxable: Amount above exempt is added to income, taxed at slab
- Lifetime limit: ₹20L is total across all employers. Previous gratuity reduces future exemption
Who Is Covered Under the Gratuity Act?
- Factories, mines, oilfields, plantations, ports, railways, shops with 10+ employees.
- Other establishments with 10+ employees as notified by government.
- 5 years minimum service (same employer) for gratuity eligibility. Death/disablement: no minimum.
Tax Exemption Formula (Act-Covered)
Worked Example
📊 Last basic+DA ₹80,000, 20 years service, gratuity ₹18.5 lakh
Government Employees
Central and state government employees get full gratuity exemption. No ₹20L cap, no formula—the entire amount is tax-free. This includes employees of PSUs that follow government rules for gratuity.
Employees Not Covered Under the Act
For employees not covered (e.g. some small firms, certain sectors), exemption is the lowest of: (1) actual gratuity, (2) ₹20 lakh, or (3) half-month salary for each completed year (based on avg of last 10 months). The calculation differs from the Act formula. Check with your employer or a CA.
Lifetime Limit: ₹20 Lakh
The ₹20 lakh exemption is a lifetime limit across all employers. If you received ₹8 lakh tax-free gratuity from a previous employer, only ₹12 lakh of future gratuity is exempt. Keep records of past gratuity to avoid under-reporting.
When Is Gratuity Paid?
- Superannuation (retirement): After 5+ years.
- Resignation: After 5+ years.
- Death: Paid to nominee. No 5-year rule.
- Disablement: No 5-year rule.
Use Our Gratuity Calculator
Enter last drawn basic+DA and years of service. Get gratuity amount and approximate tax. Plan for retirement or job change.
Disclaimer
Tax rules as of current FY. Verify with employer/CA. Government employees have different rules.