Gratuity Tax Exemption 2026: How Much of Your ₹20 Lakh Payout Is Actually Tax-Free

By Nitish Bharadwaj · Published Jul 20, 2026 · 6 min

Section 10(10) of the Income Tax Act exempts gratuity up to ₹20 lakh — a ceiling the CBDT raised from ₹10 lakh in 2019 — and this exemption survives in both the old and new tax regime, unlike almost every other salary deduction. Government employees get a full, uncapped exemption. Private-sector employees covered under the Payment of Gratuity Act, 1972 use a 15/26-day formula; those not covered use a different half-month formula. This guide walks through both formulas with worked examples and explains what happens to gratuity paid to a deceased employee's family.

Gratuity is a lump-sum payment your employer owes you for continuous service, and it is taxed differently from almost everything else in your salary — up to ₹20 lakh of it is exempt under Section 10(10) of the Income Tax Act, and that exemption applies whether you file under the old regime or the new one. How much of your actual payout is tax-free depends on which of three categories you fall into, and the formula changes accordingly.

The ₹20 Lakh Ceiling — And Why It Changed

The Payment of Gratuity Act, 1972 originally capped the tax-exempt amount at ₹10 lakh. The Payment of Gratuity (Amendment) Act, 2018 raised the statutory ceiling, and the CBDT notified the revised ₹20 lakh exemption limit under Section 10(10)(iii) effective March 29, 2018. That figure has not changed since — it caps the exemption uniformly across all three categories below, though how much of your specific payout falls under it depends on which formula applies to you.

Three Categories, Three Formulas

Not every employee's exempt amount is calculated the same way. Government employees get the simplest treatment; private-sector employees are split into two groups depending on whether their employer is covered under the Payment of Gratuity Act, 1972.

The Not-Covered Formula Rounds Differently

The two private-sector formulas differ in a detail payroll teams sometimes miss: employees covered under the Act get any part-year above six months rounded up to a full year, while employees not covered under the Act have fractional years dropped entirely — 22 years and 7 months of service counts as just 22 completed years, not 23. That difference alone can shift the exempt amount by tens of thousands of rupees, so confirm which category applies to you before accepting your employer's calculation.

Both Regimes, No Exception

Almost every familiar deduction disappears the moment you choose the new tax regime — Section 80C, Section 80D, HRA exemption, and home loan interest under Section 24 all vanish. Gratuity is one of a small handful of exemptions that survives regardless of regime, alongside the employer's NPS contribution under Section 80CCD(2). If gratuity is a meaningful part of your retirement or resignation payout, the ₹20 lakh exemption holds whether you file under the old or new regime this ITR season.

What Happens if the Employee Has Died?

Gratuity paid to a nominee or legal heir after an employee's death is treated differently again — it is not taxed as the deceased's salary income, since the right to receive it only arises on death. It is generally treated as a capital receipt in the recipient's hands rather than salary, and does not attract income tax the way a gratuity received on retirement or resignation does. Families receiving a death gratuity should still confirm the exact treatment and any employer-side TDS with a tax professional before filing.

Bottom Line

Up to ₹20 lakh of gratuity is tax-free for most employees, fully tax-free with no ceiling for government employees, and the exact exempt figure for everyone else depends on a formula that varies by whether the employer falls under the Payment of Gratuity Act. Unlike most salary deductions, this one survives your choice of tax regime — worth checking carefully in the ITR you file for FY 2025-26, especially if your employer's Form 16 has already assumed a number you have not verified. If your final settlement also includes a payout for unused earned leave, that's taxed under an entirely separate provision — our leave encashment exemption guide covers the ₹25 lakh lifetime cap that applies to it.