Gratuity Tax Exemption
Updated November 2026 · Free · No sign-up
Calculate gratuity tax exemption — government employees: fully exempt; private employees under the Gratuity Act: exempt up to the least of ₹20 lakh, actual gratuity, or 15/26 × last salary × years — the excess taxes as salary.
Quick answer: Private (Act-covered) exemption = least of: (a) ₹20,00,000 lifetime cap, (b) gratuity received, (c) 15/26 × last drawn (basic+DA) × completed years (6+ months rounds up). Government employees: 100% exempt. Non-covered employees: a half-month-average-salary variant applies.
The Three Regimes
| Who | Exemption |
|---|---|
| Government employees | Fully exempt — whatever the amount |
| Private, Act-covered (10+ employee establishments) | Least of: ₹20L cap • actual received • 15/26 × last (basic+DA) × years (6+ months rounds up) |
| Private, non-covered | Least of: ₹20L • actual • half-month AVERAGE salary (10-month average) × completed years (no rounding up) |
The ₹20L cap is LIFETIME across employers; the excess over the exempt amount taxes as salary (with Section 89 relief available since it’s arrears-like). Death gratuity to nominees: fully exempt in heirs’ hands.
Worked Example
₹80,000 basic+DA, 14.6 years (→15), ₹12,00,000 received: formula = 15/26 × 80,000 × 15 = ₹6,92,308 → least of (20L, 12L, 6.92L) = ₹6,92,308 exempt; ₹5,07,692 taxable as salary. The gap exists because employers often pay ABOVE the statutory formula (full months, better multiples) — generosity is taxable.
Planning Notes
The 6-month rounding (14.6 → 15 years) is worth real money — exit dates matter; basic+DA structure (not gross) drives the formula — low-basic CTCs shrink the exemption; and new-regime taxpayers keep this exemption (it’s a Section 10(10) item, not a Chapter VI-A deduction). Verify current caps — the ₹20L limit was last raised in 2018 and revision proposals recur.
Mechanics
Employers compute and withhold TDS on the taxable excess in the final settlement; Form 16 shows the split. Multiple gratuities across a career: the ₹20L cap aggregates — track your used headroom. The base entitlement math: gratuity calculator.
Frequently Asked Questions
How much gratuity is tax-free?
Government: all of it. Private Act-covered: the least of ₹20 lakh (lifetime), the amount received, or 15/26 × last basic+DA × years (6+ months rounding up).
What happens above the exemption?
The excess taxes as salary in the year of receipt — with Section 89 relief available to spread the slab impact.
Is the ₹20 lakh cap per employer?
No — lifetime across all employers; earlier exempt gratuities consume the headroom.
Does the new tax regime keep this exemption?
Yes — Section 10(10) exemptions survive the new regime; this isn’t an 80C-style deduction.
How does rounding work?
Act-covered: 6+ months of a part year rounds UP to a full year in the formula; non-covered employees use completed years only.
✓ Formula verified • Last updated: November 3, 2026