How is gratuity taxed?

CA Vijay R Singh, FCA
Chartered Accountant · ICAI M.No. 153926 · FRN 136869W

Short answerGratuity received on retirement or leaving a job is exempt up to ₹20 lakh for non-government employees — the exemption is the least of the actual gratuity, ₹20 lakh, or a formula based on your last salary and years of service. Government employees’ gratuity is fully exempt. Any excess is taxed as salary.

The exemption limit

For a non-government employee covered by the Payment of Gratuity Act, the exempt amount is the least of: the actual gratuity received; ₹20 lakh (the lifetime cap); and 15 days’ salary for each completed year of service (based on your last drawn salary). Whatever is left over is taxable as salary.

Government and multiple employers

Gratuity for central/state government employees is fully exempt. The ₹20 lakh ceiling is a lifetime limit across all employers — so if you claimed exemption at an earlier job, it reduces what is available now. Confirm the current ceiling and formula per the latest notification.

A worked example

Example: you retire from a private company with ₹22 lakh gratuity after 25 years. The formula and the ₹20 lakh cap limit the exemption to (say) ₹20 lakh, so ₹2 lakh is taxable at your slab. Had you taken ₹6 lakh of exemption at a previous job, only ₹14 lakh would remain available here. The exemption is available in both regimes. Our team can compute it correctly.

Income Tax

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This answer is general information for taxpayers, not tax advice. Tax rates, thresholds and forms change with each Finance Act — please confirm the current position for your own facts, or speak to us, before acting.