Gratuity Exemption Under Section 10(10): The ₹20 Lakh Limit Explained
Last verified: June 2026, against the Income Tax Act and related provisions cited below. Figures apply to FY 2025-26 (AY 2026-27). General information, not personal tax advice.
Gratuity — the lump sum your employer pays for long service — is one of the most tax-friendly payouts you will receive, but only up to a limit. Under Section 10(10), a large part (up to ₹20 lakh for most private employees) is exempt. Here is how the exemption is calculated.
Government vs non-government employees
Government employees: gratuity received on retirement or death is fully exempt. Non-government employees: the exemption is capped, and the calculation depends on whether you are covered by the Payment of Gratuity Act.
If covered by the Payment of Gratuity Act
The exemption is the least of:
- Actual gratuity received;
- ₹20,00,000 (the overall lifetime ceiling, raised in 2019);
- 15 days’ salary for each completed year of service, computed as (15 × last drawn salary × years of service) ÷ 26, where salary = basic + dearness allowance.
If not covered by the Act
The exemption is the least of: actual gratuity; ₹20,00,000; and half a month’s average salary (last 10 months) for each completed year of service.
Eligibility: the 5-year rule
Gratuity is generally payable after 5 years of continuous service. This minimum is waived if service ends due to death or disablement, in which case gratuity is paid (and the death gratuity to nominees enjoys favourable treatment).
Worked example
Last drawn salary (basic + DA) ₹60,000; 20 years of service; covered by the Act. Formula amount = (15 × 60,000 × 20) ÷ 26 = ₹6,92,308. If actual gratuity received is ₹7,00,000, the exemption is the least of {₹7,00,000; ₹20,00,000; ₹6,92,308} = ₹6,92,308, and ₹7,692 is taxable.
Both regimes
The Section 10(10) exemption applies under both the old and the new tax regime. The ₹20 lakh is a lifetime cap across employers. You can estimate your figure with our gratuity calculator.
FAQs
What is the maximum tax-free gratuity?
₹20 lakh for non-government employees (a lifetime ceiling); government employees’ gratuity is fully exempt.
Is 5 years’ service mandatory?
Yes for normal gratuity, but the condition is waived in case of death or disablement.
Is gratuity exempt under the new regime?
Yes. The Section 10(10) exemption applies under both regimes.
How is the 15-days formula computed?
(15 × last drawn basic+DA × completed years) ÷ 26 for employees covered by the Payment of Gratuity Act.
