Gratuity Exemption under Section 10(10) of the Income-tax Act, 1961

Gratuity is a retirement benefit payable by an employer to an employee in recognition of long and continuous service. To provide relief to employees, the Income-tax Act, 1961 grants exemption on gratuity receipts under Section 10(10). The extent of exemption depends upon the category of employee, i.e., Government or non-Government, and whether the establishment is covered under the Payment of Gratuity Act, 1972.

• For Government employees (Central/State/Local authorities), gratuity is fully exempt from tax.
• For non-Government employees, gratuity is exempt to the extent of limits prescribed under Section 10(10)(ii) and 10(10)(iii), subject to an overall lifetime ceiling of ₹20,00,000. Any amount received beyond the exemption limit is taxable under the head “Income from Salary.”

Importantly, the benefit of exemption under Section 10(10) is available under both the old and the new tax regimes (u/s 115BAC). Unlike various deductions and allowances which are disallowed in the new regime, retirement-related exemptions such as gratuity, leave encashment, retrenchment compensation, commuted pension, etc. continue to be available.

Thus, Section 10(10) ensures tax relief on gratuity irrespective of whether an assessee opts for the old regime or the new concessional regime, safeguarding the retirement corpus of employees.

Section 10(10): Exemption of Gratuity

Gratuity is exempt from tax depending on the category of employee:

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1. Government Employees

• Includes: Central Govt., State Govt., Defence, PSU employees (if treated as Govt.), and Local Authorities.
• Exemption: Fully exempt – entire gratuity received is not taxable.
• No monetary ceiling.

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2. Non-Govt. Employees covered under the Payment of Gratuity Act, 1972

• Applies to factories, mines, oilfields, plantations, ports, railways, shops or establishments with 10 or more employees.
• Exemption Limit: Least of the following:
  1. ₹20,00,000 (overall lifetime limit),
  2. Actual gratuity received,
  3. 15 days’ wages for every completed year of service (or part thereof >6 months), calculated as:

  15/26 × Last drawn salary × Years of service\text{15/26 × Last drawn salary × Years of service}15/26 × Last drawn salary × Years of service

  • Salary = Basic + DA (if considered for retirement benefits).
  • Note: “15/26” because monthly salary divided by 26 (working days in a month).

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3. Non-Govt. Employees Not Covered under the Payment of Gratuity Act

• Applies to other private sector employees not covered by the Act.
• Exemption Limit: Least of the following:
  1. ₹20,00,000 (overall lifetime limit),
  2. Actual gratuity received,
  3. Half month’s average salary × Completed years of service.
  • Salary = Basic + DA (if retirement benefit) + Commission as % of turnover.
  • Average salary = Last 10 months’ average salary preceding retirement/termination.
  • Completed years only (part years ignored).

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Important Points

• Overall lifetime limit of ₹20,00,000 applies (even if received from multiple employers).
• Any amount exceeding exemption is taxable under “Income from Salary.”
• Exemption available under both old regime and new regime (115BAC).

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✅ Summary Table