Gratuity Tax Rules in India (2026)

Section 10(10) of the Income Tax Act splits gratuity into three categories, each with its own exemption rule:

• Section 10(10)(i): Government employees — entire amount fully exempt, no ceiling.
• Section 10(10)(ii): Private employees covered under the Payment of Gratuity Act, 1972 — exempt up to the lowest of three amounts (see below).
• Section 10(10)(iii): Private employees NOT covered under the Act — exempt up to the lowest of three different amounts.

If your employer is covered by the Payment of Gratuity Act, 1972 (any factory, shop or establishment with 10+ employees), the exempt portion of your gratuity is the LEAST of the following three amounts:

• (a) Actual gratuity received
• (b) ₹20,00,000 — the lifetime cumulative ceiling
• (c) (15 ÷ 26) × Last Drawn Salary × Completed Years of Service (last drawn salary = Basic + DA on the date of exit)

If your employer is not covered by the Act and pays gratuity voluntarily, the exemption rule changes slightly. The LEAST of these three amounts is exempt:

• (a) Actual gratuity received
• (b) ₹20,00,000 lifetime ceiling
• (c) ½ × Average Salary of the last 10 months × Completed Years of Service

Suppose you retire from a covered private company after 30 years with a last drawn Basic + DA of ₹1,20,000 per month, and your employer pays you ₹25 lakh as gratuity (the maximum under the Act).

Formula amount = (15 ÷ 26) × 1,20,000 × 30 = ₹20,76,923. The three amounts to compare are ₹25 lakh (actual), ₹20 lakh (statutory cap), and ₹20.77 lakh (formula). The lowest — ₹20 lakh — is exempt. The remaining ₹5 lakh is added to your salary income and taxed at slab rates.

The ₹20 lakh exemption is NOT per employer — it is a once-in-a-lifetime cumulative ceiling. If you received ₹12 lakh as exempt gratuity from a previous employer, only ₹8 lakh is available as exemption against your next gratuity payout.

This is a frequently missed detail by employees switching jobs multiple times in senior roles. Always disclose previously claimed gratuity exemption when filing Form 10E or computing exempt income for a fresh exit.

A common worry in 2026 is whether opting for the new tax regime under Section 115BAC affects gratuity exemption. It does not. Section 10(10) exemption is preserved under both regimes; the new regime only removes deductions and certain allowances but retains specific exemptions like gratuity, leave encashment on retirement, VRS compensation, and pension commutation.

If you received gratuity during the financial year, your Form 16 will show the total amount under Annexure-B with the exempt portion already excluded from taxable salary. Cross-check this by computing your own least-of-three figure.

In ITR-1 (for incomes up to ₹50 lakh with only salary, one house, and other simple sources), report exempt gratuity under the field 'Section 10(10) — Gratuity' inside the exempt income section. In ITR-2, use Schedule EI (Exempt Income) and ensure the taxable portion is included under Schedule S (Salary).

If a portion of your gratuity is taxable and the resulting tax in the year of receipt is higher than what it would have been had the gratuity been spread over the years it was earned, you can claim relief under Section 89(1). The relief is calculated by recomputing tax for each of the past years to which the gratuity relates and is filed via Form 10E before submitting your ITR.

Form 10E is mandatory — failing to file it before the ITR results in the relief being disallowed, even if otherwise eligible.

Employers are required to deduct tax at source only on the taxable portion of gratuity. If your computed exempt amount equals the gratuity paid, no TDS is required. If part is taxable, the employer adds it to your other salary income for the year and deducts TDS at the applicable slab rate, reflecting it in Form 16 and Form 26AS.