Gratuity Exemption Limit FY 2025-26 – Section 10(10) Rules

Last updated: August 2026 — FY 2025-26 (AY 2026-27)

Gratuity is the lump sum an employer pays for long service. Under Section 10(10) of the Income Tax Act a large part of it is tax free — but how much depends on which category of employee you are.

The exemption applies under both the old and the new tax regime. Section 10(10) is an exemption, not a Chapter VI-A deduction, so unlike 80C or 80G it was not withdrawn under the new regime. Whichever regime you file under, your eligible gratuity stays tax free.

The three categories of employee

Category	Exemption
Government employees — Central, State or local authority	Fully exempt, no upper limit
Covered by the Payment of Gratuity Act, 1972	Least of three amounts — see below
Not covered by the Act	Least of three amounts — different formula

If you are covered by the Payment of Gratuity Act, 1972

The Act applies to establishments with 10 or more employees. Your exemption is the least of:

1. ₹20,00,000
2. The actual gratuity received
3. 15/26 × last drawn salary × completed years of service

• Salary here means basic pay plus dearness allowance
• 26 represents working days in a month; 15 represents 15 days’ wages per year
• A part-year of more than six months counts as a full year. So 7 years 8 months is treated as 8 years

Worked example

Last drawn basic + DA	₹80,000 per month
Completed service	22 years 7 months → counted as 23 years
Actual gratuity received	₹18,00,000
Formula: 15/26 × 80,000 × 23	₹10,61,538
Statutory ceiling	₹20,00,000
Exempt (least of the three)	₹10,61,538
Taxable as salary income	₹7,38,462

Note how the ceiling was not the binding constraint here — the formula was. That is the usual outcome, and it is why simply assuming ₹20 lakh is tax free leads people to under-report.

If you are not covered by the Payment of Gratuity Act

The exemption is the least of:

1. ₹20,00,000
2. The actual gratuity received
3. Half month’s average salary × completed years of service

Two differences from the covered case, and both matter:

• Average salary means the average of the last 10 months preceding the month of leaving — not the last drawn salary. Salary includes basic, DA and commission where it is a fixed percentage of turnover
• Completed years only. Any part-year is ignored entirely, however close to a full year. 22 years 11 months counts as 22 years, not 23

The ₹20 lakh limit is a lifetime cap

If you received exempt gratuity from an earlier employer, that amount is set against the ₹20,00,000 ceiling. Someone who claimed ₹8,00,000 exempt at a previous job has only ₹12,00,000 of headroom remaining, no matter how large the new payout. The cap follows you, not the job.

When gratuity is fully taxable

• Gratuity received while still in service — the Section 10(10) exemption applies on retirement, resignation, death or disablement, not to a payment made mid-employment
• Amounts above the exempt figure — taxed under the head Salaries at your slab rate

Gratuity on death of the employee

Gratuity paid to the widow, children or legal heirs on the death of an employee is fully exempt from tax in their hands. The five-year minimum service condition also does not apply in cases of death or disablement.

Who is eligible for gratuity at all?

Under the Payment of Gratuity Act you must complete five years of continuous service with the employer — waived where employment ends due to death or disablement. Gratuity becomes payable on retirement, resignation, superannuation, death or disablement.

How to report gratuity in your ITR

1. Your employer should show the gratuity and the exempt portion in Form 16, Part B
2. Report the gross gratuity within Schedule S (Salary)
3. Claim the exempt amount under “Allowances exempt under Section 10”, selecting Section 10(10)
4. Cross-check against Form 26AS and AIS — the payment is reported by your employer and a mismatch invites a notice

Frequently asked questions

What is the gratuity exemption limit for FY 2025-26?

₹20,00,000 for non-government employees, unchanged since 29 March 2018. Government employees have no ceiling — their gratuity is fully exempt.

Is gratuity taxable under the new tax regime?

The exemption under Section 10(10) applies under both regimes. It is an exemption rather than a deduction, so it survived the move to the new regime.

Is the ₹20 lakh limit per employer or for life?

For life. Exempt gratuity received from earlier employers reduces the balance available.

I completed 4 years 8 months. Do I get gratuity?

Ordinarily no — the Act requires five years of continuous service, and 4 years 8 months does not qualify. (Some High Courts have accepted 4 years 240 days as sufficient; treatment varies, so take advice on your facts.) The rounding rule that treats over six months as a full year applies to calculating gratuity, not to establishing the five-year eligibility.

Does my notice period count?

Where the notice period is served and forms part of continuous service, it counts. Pay in lieu of notice generally does not.

Is gratuity from more than one employer in the same year exempt separately?

No. The exemption is computed against the single lifetime ceiling of ₹20,00,000 across all employers.

Retiring this year?

Gratuity, leave encashment, pension commutation and provident fund each have their own exemption rules, and they interact. Getting the computation right at retirement is worth real money. Our Chartered Accountants will work through your Form 16 and settlement statement and file accordingly. Send us your details →

Related guides

• How to file ITR for salaried employees
• Leave Travel Allowance exemption
• Income tax slabs FY 2025-26
• New tax regime vs old regime

Disclaimer: Reflects the law for FY 2025-26 (AY 2026-27) as understood in August 2026. Consult a qualified Chartered Accountant before acting on your own facts.