The 5-Year Reward
Gratuity is a lump sum payment made by an employer as a token of appreciation for your long-term service. You are legally entitled to it if you resign, retire, or are terminated after completing at least 5 continuous years with the same company.
When that big check hits your bank account, the immediate question is: How much of this will the taxman take?
Tax Exemption Rules for Gratuity
The taxability of gratuity depends on your employment type and whether your company is covered under the Payment of Gratuity Act, 1972.
1. Government Employees For employees of the Central Government, State Government, or local authorities, the entire gratuity amount received is **fully exempt** from income tax under Section 10(10)(i).
2. Private Employees COVERED by the Gratuity Act Most mid-to-large private companies fall here. The exempt amount is the **lowest** of the following three: 1. Actual gratuity received. 2. The statutory limit of **₹20 lakhs**. 3. 15 days' salary for every completed year of service (calculated as **Last drawn salary × 15/26 × Number of years of service**).
3. Private Employees NOT COVERED by the Gratuity Act If your company is not covered by the Act, the exemption is the **lowest** of: 1. Actual gratuity received. 2. The statutory limit of **₹20 lakhs**. 3. Half month's average salary for every completed year of service (calculated as **10-month average salary × 1/2 × Number of years of service**).
Note: The ₹20 lakh limit is a lifetime limit across all employers.
Example Calculation
You worked at a covered company for 8 years. Your last drawn salary (Basic + DA) was ₹1,00,000. You received ₹5,00,000 as gratuity. - Statutory limit: ₹20,00,000 - Formula limit: ₹1,00,000 × 15/26 × 8 = ₹4,61,538 - Actual received: ₹5,00,000
The lowest is ₹4,61,538. This amount is tax-free. The remaining ₹38,462 (₹5L - ₹4.61L) will be added to your taxable salary.
The exemption limits in one view
Gratuity is a thank-you payout for long service. How much escapes tax depends on your employer type.
| Employer type | Maximum tax-free gratuity |
|---|---|
| Government | Fully exempt |
| Private, covered by the Act | Lowest of actual, Rs 20,00,000, or the 15/26 formula |
| Private, not covered | Lowest of actual, Rs 20,00,000, or the half-month formula |
The statutory tax-free ceiling for gratuity is Rs 20,00,000 and applies as a lifetime limit across employers. Source: Income Tax Act Section 10(10); Payment of Gratuity Act, 1972.
What you should do
- Confirm you have completed five continuous years of service for eligibility
- Compute the lowest of the three applicable tests as your exempt amount
- Verify the taxable balance is added to gross salary in your Form 16
- Remember the Rs 20,00,000 cap is shared across your whole career
Common mistake
Assuming all gratuity is tax-free. Only the lowest-of-three amount is exempt for private employees; anything above the cap is taxed at your slab rate.
Reporting Gratuity in ITR
Your employer will calculate the exempt and taxable portions and include them in your Form 16. - The taxable part is bundled into your Gross Salary. - The exempt part is listed under Section 10(10) in Part B of Form 16.
When you upload your Form 16 to LastMinute ITR, we automatically map these figures to the correct fields in your tax return, ensuring you claim your rightful exemption without any manual math.