Gratuity Tax Exemption Rules India 2025 — How Much is Tax-Free?

Gratuity is one of the best tax-efficient retirement benefits in India. For most employees, the entire gratuity amount is tax-free. Here's exactly how it works.

Gratuity Tax Rules — 3 Categories of Employees

Category 1: Government Employees

Central and state government employees, defence personnel — entire gratuity is tax-free. No limit.

Category 2: Private Sector — Covered Under Payment of Gratuity Act

Establishments with 10+ employees — employees covered under the Act. Exempt = minimum of 3 amounts:

1. Actual gratuity received
2. (15/26) × Last drawn salary × Completed years of service
3. ₹20,00,000 (statutory maximum)

Whichever is least — that amount is tax-free. Any gratuity above this is taxable as salary.

Category 3: Private Sector — NOT Covered Under Gratuity Act

Establishments with fewer than 10 employees. Exempt = minimum of:

1. Actual gratuity received
2. Half month's average salary × Completed years (average = last 10 months' salary ÷ 10)
3. ₹20,00,000

Calculation Example

When is Gratuity Taxable?

Gratuity becomes taxable when:

• The actual gratuity amount exceeds the exempt amount (uncommon for most employees)
• Cumulative gratuity from all employers in lifetime exceeds ₹20 lakh
• You've already claimed ₹20L exemption in a previous employment

₹20 lakh is a lifetime limit — not per job. If you've received ₹15L tax-free in one job, only ₹5L more is available as exemption across all future employers.

Gratuity on Death or Disability

If gratuity is received by nominee due to employee's death — it is completely tax-free regardless of amount. Similarly, gratuity on total permanent disability is fully exempt.

How to Show Gratuity in ITR

• Gratuity is shown in Form 16 under "Income chargeable under Salaries"
• Exempt portion shown separately in the "Allowances exempt under Section 10" part
• In ITR, include exempt gratuity in Schedule EI (Exempt Income)
• Taxable portion (if any) added to gross salary