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Tax on Gratuity Amount in India

Gratuity is a reward given to employees for their loyal service. It’s a one-time payment made when you leave your job, retire, or in some cases, due to health reasons. But many people are not sure how gratuity is taxed in India.

This article explains, in simple terms, how gratuity tax works, who is eligible for tax exemption, what limits apply, and how to calculate the taxable portion using official Indian government guidelines.

What Is Gratuity and Why Is It Taxed?

Gratuity is an amount your employer pays to you as a token of appreciation for long service. Since it is received as part of your income, it can be taxable under the Income Tax Act, 1961.

However, the law also provides generous exemptions so that employees can keep most of this benefit tax-free. These rules are defined in Section 10(10) of the Income Tax Act.

Reference: You can view the official section at the Government of India’s Income Tax website: https://incometaxindia.gov.in

Who Has to Pay Tax on Gratuity?

The tax rules depend on where you work. In India, employees are grouped into three main categories:

    1. Government Employees
      Gratuity received by Central and State Government employees is fully tax-free under Section 10(10)(i).
    2. Private Sector Employees Covered Under the Payment of Gratuity Act, 1972
      The exemption is available under Section 10(10)(ii) up to a certain limit.
  • Private Employees Not Covered Under the Act
    These employees can claim exemption under Section 10(10)(iii), again within a set limit.

What Is the Tax-Free Limit for Gratuity?

The maximum tax-free gratuity limit is ₹20 lakh in India.
This was increased from ₹10 lakh to ₹20 lakh after the 7th Pay Commission recommendation and notification by the Ministry of Labour and Employment in March 2018.

Reference: Official notification available at the Ministry of Labour and Employment:
https://labour.gov.in

How to Calculate the Taxable and Tax-Free Gratuity

Let’s take two examples to understand how the calculation works.

Example 1: Government Employee

If a government employee receives ₹15 lakh as gratuity, the entire ₹15 lakh is tax-free.

Example 2: Private Employee Covered Under the Act

Gratuity is calculated as:

(Last Drawn Salary × 15 × Years of Service) / 26

The tax exemption is the lowest of the following three amounts:

  1. ₹20,00,000 (the government-approved limit)
  2. Actual gratuity received
  3. (Last Drawn Salary × 15 × Number of Years of Service) / 26

Any amount above the exempted limit becomes taxable income under the “Salary” head.

When Is Gratuity Fully Tax-Free?

Gratuity is completely tax-free for:

  • Central or State Government employees
  • Employees of local authorities (such as municipalities)
  • Employees of government-aided institutions

For all others, tax exemption applies only up to ₹20 lakh in a lifetime.

When Does Gratuity Become Taxable?

Gratuity becomes taxable when the total amount you receive exceeds ₹20 lakh.

The extra amount is added to your income and taxed as per your income tax slab.

How to Reduce or Avoid Gratuity Tax

You can reduce your taxable amount by planning carefully:

  • Try not to receive multiple gratuity payments that exceed ₹20 lakh in total.
  • Keep records of your service, salary slips, and gratuity payment details.
  • When filing your Income Tax Return (ITR), mention gratuity under “Exempt Income” to avoid confusion.

These simple steps ensure you make the most of your gratuity without losing money to unnecessary taxes.

Can You Calculate Gratuity Tax Online?

Yes. You can use a Gratuity Calculator to instantly find out how much of your gratuity is taxable and how much is tax-free.

By entering your basic pay, dearness allowance, and years of service, you can see the details

Frequently Asked Questions about Tax on Gratuity Amount 

1. Is gratuity taxable in India?Yes, gratuity can be taxable, but government employees get full exemption. Private employees get tax exemption up to ₹20 lakh.

2. What section of the Income Tax Act applies to gratuity?

Section 10(10) of the Income Tax Act, 1961 covers the rules for gratuity taxation.

3. How much gratuity is tax-free for private employees?

Up to ₹20 lakh is tax-free; any amount above this limit is taxable.

4. Is gratuity received after an employee’s death taxable?

No, gratuity received by the family of a deceased employee is fully exempt from tax.

5. Should I show gratuity in my income tax return?

Yes. Even if it’s tax-free, you should report it under the “Exempt Income” section in your ITR.

6. Where can I find the official gratuity tax rules?

You can read them on these government websites:

https://incometaxindia.gov.in (Income Tax Department of India)

https://labour.gov.in (Ministry of Labour and Employment)

Final Thoughts

Understanding how gratuity is taxed can help you plan your retirement better.
Government employees enjoy complete exemption, while private employees can save up to ₹20 lakh from tax.

Always check the latest government updates, and use a Gratuity Calculator to estimate your taxable and non-taxable portions.

A little awareness can help you make the most of your gratuity benefits, and keep more of your hard-earned money.