Most private-sector employees who get the statutory gratuity pay no tax on it at all, because the law's own formula is also the tax formula. Tax bites in two cases: when your employer pays more than the 15/26 formula, and when lifetime gratuity passes ₹20 lakh.
Salary here means basic + dearness allowance (DA forming part of retirement benefits), plus commission at a fixed percentage of turnover if you earn it.
Estimate only, not tax advice. Gratuity received while still in service is fully taxable. Confirm the limit that applies to your year with your employer or a tax adviser.
For private-sector employees, the exempt part of gratuity is the lowest of:
Because covered employers pay gratuity using that same 15/26 formula, (a) and (c) are equal for most people, and the whole amount is tax-free until it reaches ₹20 lakh.
Covered employer: 4 months is not more than six, so 12 years count. ₹60,000 × 15 ÷ 26 × 12 = ₹4,15,385. Tax-free: ₹4,15,385; taxable: ₹4,84,615. If the employer were not covered: ₹60,000 ÷ 2 × 12 = ₹3,60,000 tax-free, and ₹5,40,000 taxable.
Finding: only if your employer pays the statutory amount. An employer that pays one month per year instead of 15/26 of a month is paying 73% more than the formula, and that extra is taxable even when the total is far below ₹20 lakh.
| Scenario | Received | Tax-free | Taxable |
|---|---|---|---|
| ₹40,000 · 8 yrs · paid by formula | ₹1,84,615 | ₹1,84,615 | ₹0 |
| ₹60,000 · 12 yrs · employer pays 1 month/yr | ₹7,20,000 | ₹4,15,385 | ₹3,04,615 |
| ₹1,50,000 · 20 yrs · paid by formula | ₹17,30,769 | ₹17,30,769 | ₹0 |
| ₹2,50,000 · 25 yrs · employer pays ₹30 lakh | ₹30,00,000 | ₹20,00,000 | ₹10,00,000 |
The tax limit is ₹20 lakh, set by Notification 16/2019 for gratuity received on or after 29 March 2018. The ₹25 lakh figure in recent headlines is the gratuity ceiling for central government employees, whose gratuity is fully tax-exempt anyway. The Income-tax Act, 2025, in force from 1 April 2026, keeps the least-of test and leaves the limit to notification; we found no new figure as of 23 October 2026.
Gratuity paid to government employees is fully exempt. For private-sector employees it is exempt up to the least of the gratuity received, ₹20 lakh (a lifetime limit) and a formula amount; anything above that is taxed as salary in the year you receive it.
₹20 lakh, notified on 8 March 2019 (Notification 16/2019) for gratuity received on or after 29 March 2018. Headlines about ₹25 lakh refer to the gratuity ceiling for central government employees, not this tax limit.
No. It is a lifetime limit. If you claimed an exemption on gratuity from an earlier employer, that amount is deducted from the ₹20 lakh available now.
The formula amount becomes half of your average monthly salary over the last 10 months, multiplied by completed years of service, with part years ignored. It is usually lower than the 15/26 formula used for covered employers.
The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and keeps the same least-of test in Section 19, with the limit set by notification. We have not found a new notified figure, so ₹20 lakh is used here; confirm with your employer or tax adviser.
Because gratuity is a lump sum for several years of work, relief under the arrears and advance-salary provisions (Section 89 of the 1961 Act, carried into the 2025 Act) may reduce the tax on the taxable part. Your employer or tax adviser can compute it.