Tag: Gratuity

Gratuity: Rules, Formula and Income Tax Exemption (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 02 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Gratuity is payable on five years of continuous service (one year for fixed-term employees) at 15 days’ wages for each completed year, worked out as last monthly wages ÷ 26 × 15 × years.
  • The Code on Social Security, 2020 has been in force since 21/11/2025 and now governs gratuity; the ₹20 lakh ceiling is a notified amount, so check it before you rely on it.
  • Under the Income-tax Act, 2025 the exemption is in section 19(1): government employees get it in full, others get the least of the gratuity received, the notified limit (₹20 lakh) and the statutory formula.
  • The gratuity exemption is also available in the new tax regime.

Gratuity is a lump sum an employer pays for long service. Two questions come up every time: how much is payable, and how much of it escapes tax. This post answers both under the Code on Social Security, 2020 and the Income-tax Act, 2025.

Which law governs gratuity now

The Code on Social Security, 2020 repealed the Payment of Gratuity Act, 1972 (section 164(1)). The four labour codes were made effective from 21 November 2025 (PIB press release), and the Ministry of Labour has said gratuity under the Code applies from that date. Notifications made under the old Act, such as the ceiling, are deemed to continue under the corresponding provisions of the Code (section 164(2)(a)). Gratuity is now in sections 53 to 56 of the Code. Older articles that quote the 1972 Act describe the same scheme, but the section numbers have changed.

Eligibility and formula under section 53

  • Five years of continuous service is needed on superannuation, retirement, resignation, death or disablement. The five years are not needed on death or disablement.
  • Fixed-term employees are paid gratuity pro rata and do not need five years. The Ministry of Labour has clarified (FAQs of 16/03/2026) that a fixed-term employee is eligible after rendering one year of service under the contract. This covers employees engaged directly by the employer, not contract labour supplied by a contractor.
  • Rate: 15 days’ wages for every completed year of service or part of a year in excess of six months, on the wages last drawn.
  • Monthly-rated employees: the 15 days’ wages are the monthly wages last drawn ÷ 26 × 15.
  • Ceiling: the Central Government notifies the maximum (section 53(3)). The Ministry of Labour’s FAQs say it is currently ₹20 lakh.
  • Time to pay: within 30 days from the date gratuity becomes payable, with simple interest for delay (section 56(3) and (4)). The employer must work out the amount and give written notice even if you have not applied.
  • Nomination: if the employee dies, gratuity goes to the nominee or heirs.
  • Forfeiture: wholly or partly, only for wilful damage to property, riotous or violent conduct, or an offence involving moral turpitude committed during employment.

Gratuity = Last drawn monthly wages ÷ 26 × 15 × completed years

Example: monthly wages ₹40,000, service 8 years: 40,000 ÷ 26 × 15 × 8 = ₹1,84,615.

Under section 2(88) of the Code, “wages” are basic pay, dearness allowance and retaining allowance, and if the excluded allowances (house rent allowance, conveyance and others) are more than half of total remuneration, the excess is added back to wages. The Ministry of Labour’s FAQs say performance incentives, ESOPs and reimbursements are not wages, and that gratuity and retrenchment compensation are left out of the 50% test. If your pay structure keeps basic pay low, the gratuity base may now be higher than under the old 1972 Act, from 21/11/2025. Ask your employer how the base is worked out.

Is gratuity taxable?

Gratuity is part of salary (section 16(c) of the Income-tax Act, 2025). Section 19(1) then allows these deductions from it, in the order of the Table:

Who receives it Exempt amount
Death-cum-retirement gratuity under the Central Government pension rules or a similar government scheme (serial 3) The entire amount
Retiring gratuity under the defence services pension code (serial 4) The entire amount
Gratuity under the Payment of Gratuity Act, 1972, now the Code (serial 5) The amount received, limited to the amount worked out under section 4(2) and (3) of that Act, which gives the 15/26 formula and the ₹20 lakh ceiling
Any other gratuity on retirement, incapacity before retirement or termination (serial 6) The least of the actual gratuity, the notified amount (₹20 lakh) and half a month’s salary for each completed year

“Salary” for these purposes is basic pay plus dearness allowance, if the terms of employment provide for it. All other allowances and perquisites are left out (section 19(2)(b)).

Employees covered by the gratuity law (serial 5)

The exempt amount is the least of three figures:

  1. the gratuity actually received,
  2. the formula amount: last drawn salary ÷ 26 × 15 × completed years (a part year of more than six months counts as a year), and
  3. ₹20 lakh.

Example: last drawn basic plus DA is ₹1,00,000 a month, service is 19 years and 7 months, so 20 years are counted. Gratuity paid is ₹15,00,000.

  • Formula amount: 1,00,000 ÷ 26 × 15 × 20 = ₹11,53,846
  • Ceiling: ₹20,00,000
  • Received: ₹15,00,000
  • Exempt: ₹11,53,846. Taxable: ₹3,46,154, added to salary income.

Employees not covered (serial 6)

The exempt amount is the least of the gratuity received, ₹20 lakh and half a month’s salary for each completed year of service, where the salary is the average of the ten months before the month of the event (retirement, incapacity or termination). Only completed years count.

Example: average salary of the last ten months is ₹90,000, service is 25 years and 2 months, gratuity received is ₹14,00,000.

  • Half month’s salary: 90,000 × 1/2 × 25 = ₹11,25,000
  • Exempt: ₹11,25,000. Taxable: ₹2,75,000.

Gratuity from more than one employer

For serial 6, if you receive gratuity from more than one employer in a tax year, or received exempt gratuity in earlier years, the total exemption cannot exceed the notified limit reduced by what was already exempted (section 19(2)(a)). Keep a record of gratuity exempted in earlier jobs.

New tax regime

Of the section 19(1) Table, section 202(2) bars only serial number 1 (professional tax) in the new regime. The gratuity entries are not barred, so the gratuity exemption is available in both regimes.

Employer side

  • Contributions to an approved gratuity fund created under an irrevocable trust are deductible (section 29(1)(c)).
  • A provision for gratuity that has become payable during the tax year is deductible (section 29(1)(d)).
  • Gratuity paid during the employee’s lifetime is treated as salary (Schedule XI, Part B, paragraph 5). The income of an approved gratuity fund is itself exempt (Schedule VII).
  • TDS on the taxable part is deducted with other salary under section 392.

Gratuity and pension compared

Point Gratuity Pension
Payment One time, on leaving Monthly, for life
Paid by Employer Employer, a pension fund or the government
Condition Five years of continuous service (one for fixed-term) As per the scheme
Tax Exempt up to the limits above Taxable as salary when received (commuted lump sum has separate rules)

Things to check before you rely on this

  • The Income-tax Act, 2025 still names the Payment of Gratuity Act, 1972 in serial 5 and its section 4(2) and (3). Those sub-sections (15 days’ wages and the ceiling) are now section 53(2) and (3) of the Code, and section 164(2)(a) of the Code carries the old notifications forward, so the exemption works as described. A future amendment of the Income-tax Act may update the wording.
  • The ₹20 lakh ceiling is a notified amount, not a number in the Act. The labour ceiling dates from 29/03/2018 and the income-tax limit from S.O. 1213(E) of 08/03/2019. The Ministry of Labour still calls ₹20 lakh the current ceiling, and we found no newer notification. Check before you advise on a very large gratuity.

Frequently asked questions

Who is eligible for gratuity?

An employee who has completed continuous service of five years, on superannuation, retirement, resignation, death or disablement. Death and disablement do not need five years. A fixed-term employee is eligible after one year of service under the contract, with pro-rata gratuity.

What is the gratuity formula?

Last drawn monthly wages ÷ 26 × 15 × completed years of service. A part year of more than six months counts as a full year.

How much gratuity is tax free?

For a government employee, the whole amount. For an employee covered by the gratuity law, the least of the gratuity received, the amount worked out by the statutory formula and the notified ceiling (₹20 lakh). For others, the least of the gratuity received, the notified ceiling and half a month’s average salary for each completed year.

Is gratuity exempt in the new tax regime?

Yes. Section 202(2) bars section 19(1) serial number 1 (professional tax) in the new regime, but not the gratuity entries at serial numbers 3 to 6.

Is gratuity taxable at all?

Yes, to the extent it exceeds the exempt amount. It is part of salary (section 16), so the excess is taxed at your slab rate and TDS applies.

Can the employer forfeit gratuity?

Only in the cases the law allows: wilful damage to the employer’s property, riotous or violent conduct, or an offence involving moral turpitude committed during employment. Forfeiture can be whole or partial.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

Tax-Free Income in India: Complete List for Tax Year 2026-27

Posted on by CA Meet Dhrangadhariya

Last updated: 15 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • The Income-tax Act, 2025 lists tax-free income in Schedule II (for everyone) and Schedule III (for eligible persons), with salary items in section 19 and gifts in section 92.
  • Agricultural income, Sukanya Samriddhi payouts, PPF and EPF within the interest limits, most life insurance maturity, gratuity and VRS compensation within limits are tax-free.
  • Several Schedule III items, such as LTA and special allowances, are lost in the new tax regime.
  • Tax-free income must still be reported in the return.

Some income does not form part of your total income at all. It is not taxed and no deduction has to be claimed for it. In the Income-tax Act, 2025, which applies from 1 April 2026, this list sits mainly in Schedule II (income not to be included in total income) and Schedule III (income of eligible persons), with salary related receipts in section 19 and gifts in section 92. For FY 2025-26 the corresponding list is in section 10 of the 1961 Act.

Exemption and deduction are different

An exemption keeps the income out of total income, so you only report it. A deduction is taken from income that has been included, and is allowed only up to its limit. Standard deduction, section 80C and similar items are deductions, not exemptions.

Schedule II: tax-free for everyone

Income Conditions and limits
Agricultural income No condition. It is still counted to fix the tax rate on other income if it exceeds ₹5,000
Life insurance maturity or other payout, including bonus Policy issued 01/04/2003 to 31/03/2012: premium up to 20% of sum assured. 01/04/2012 to 31/03/2013: up to 10%. 01/04/2013 to 31/01/2021: up to 15% for a special policy and 10% for others. From 01/04/2023: below 15% (special policy) or 10% (others), and for ULIPs total yearly premium below ₹2,50,000, for other policies below ₹5,00,000 across all policies. Keyman policies and the sum under section 127(4) are not exempt. A death claim is exempt
Payment from a statutory provident fund or notified fund Interest on contributions made on or after 01/04/2021 is taxable if the yearly contribution is above ₹5,00,000 (no employer contribution) or ₹2,50,000 (other cases)
Accumulated balance of a recognised provident fund (EPF) To the extent provided in the Act; the same ₹2,50,000 and ₹5,00,000 interest limits apply
Sukanya Samriddhi Account payouts No limit
National Pension System payout On closure or opting out, up to 60% of the amount payable.
Agniveer Corpus Fund payout Whole amount
Approved superannuation fund payments On death, retirement or incapacity, and certain refunds
Scholarships Granted to meet the cost of education
Awards and rewards Instituted in the public interest by the Government or approved by it
Interest on notified Central Government securities, bonds, savings certificates and deposits As notified
Gold Deposit Bond and Gold Monetisation Scheme interest Whole amount
Interest on local authority and State pooled finance entity bonds As notified
Transfer of units of the Unit Scheme, 1964 On or after 01/04/2002
Unified Pension Scheme payouts Up to 60% of the individual corpus on retirement, and the notified lump sum

Schedule III: tax-free for eligible persons

Income Who and conditions
Sums received by a member from a Hindu undivided family Paid out of family income, and not covered by section 99(3) and (4)
Partner’s share of profit Firm separately assessed, in the profit sharing ratio. Salary and interest from the firm are taxable
Compensation for a disaster from the Government or local authority Where no deduction was earlier allowed for the loss
NPS partial withdrawal Up to 25% of the contributions made by the subscriber
Daily allowance and constituency allowance of MPs and members of State Legislatures Whole amount
Leave travel concession (LTA) Up to the prescribed journeys and amount actually spent. Not available in the new regime
Allowances and perquisites paid by the Government outside India Citizen of India serving outside India
Tax paid by the employer on a non-monetary perquisite At the employer’s option
Special allowance for actual expenditure (serial 11), and the prescribed allowances in serial numbers 12 and 13 (Rule 280) Within the limits of the Income-tax Rules, 2026. Mostly not available in the new regime
Income of Scheduled Tribe members in notified areas, and of Sikkimese See the separate post on section 10(26)

Salary related receipts (section 19)

Receipt Tax-free limit
Death-cum-retirement gratuity of government employees Entire amount
Gratuity under the Payment of Gratuity Act, 1972 As calculated under section 4(2) and (3) of that Act, up to ₹20,00,000
Other gratuity Least of the actual amount, the notified limit, and half a month’s average salary of the last ten months for each completed year of service
Commutation of pension Government employees: entire amount. Others: one-third of the pension where gratuity is received, or one-half where it is not
Retrenchment compensation to a workman Least of the compensation, the amount under section 25F(b) of the Industrial Disputes Act, 1947, and the notified amount (not less than ₹50,000)
Voluntary retirement compensation Up to ₹5,00,000
Leave encashment on retirement Government employees: entire amount. Others: least of the cash equivalent of leave (up to 30 days a year of service), ten months’ average salary, the notified limit and the amount received

“Salary” for gratuity and leave encashment means basic pay plus dearness allowance if the terms of employment provide for it, and no other allowance or perquisite. The ceilings are fixed by Central Government notification: ₹20,00,000 for gratuity (notifications of 29 March 2018 and 8 March 2019) and ₹25,00,000 for leave encashment on retirement of a non-government employee (Notification 31/2023, from 1 April 2023). Check that no later notification has changed them. Employees who change jobs should also note that the gratuity limit is a lifetime figure reduced by gratuity already exempted in earlier years.

Gifts (section 92)

Money or property received without consideration is taxable if it totals more than ₹50,000 in a year (for property bought for less than its value, if the shortfall exceeds ₹50,000). It is not taxable at all when it comes from a relative, on the occasion of the individual’s marriage, under a will or by inheritance, in contemplation of death, from a local authority, from a registered non-profit organisation (with exceptions), through certain transactions not treated as transfers, or from an individual to a trust created solely for the benefit of a relative.

New tax regime

Section 202 of the 2025 Act removes some of these when the new regime applies: the Schedule III items at serial numbers 5, 6, 7, 8, 11 and 17, and the prescribed allowances at serial numbers 12 and 13, along with professional tax and a few other deductions. Schedule II items, section 19 receipts, and gifts are not touched. The family pension deduction is ₹25,000 in the new regime and ₹15,000 otherwise, each limited to one-third of the pension.

Tax-free income is not the same as the basic exemption limit

Income up to the basic exemption limit is simply not taxed at the slab rates. The limit is ₹4,00,000 under section 202 (new regime), and in the old regime ₹2,50,000 below age 60, ₹3,00,000 for resident seniors and ₹5,00,000 for resident super seniors. On top of that, a resident individual gets a rebate: ₹60,000 where total income does not exceed ₹12,00,000 (new regime, section 156), and ₹12,500 where it does not exceed ₹5,00,000 (old regime).

Report exempt income

Show exempt income in the exempt income schedule of the return. The department matches it with Form 26AS, AIS and the Taxpayer Information Summary, and an unreported receipt causes mismatches.

Frequently asked questions

Where does the Income-tax Act 2025 list tax-free income?

In Schedule II (income not included in total income of anyone), Schedule III (for eligible persons), section 19 (salary related receipts such as gratuity and leave encashment) and section 92(3) (gifts that are not taxed).

Is life insurance maturity tax-free?

Mostly. A policy issued on or after 01/04/2023 qualifies if the premium is below 10% of the sum assured (15% for special policies) and, for non-ULIP policies, the aggregate annual premium is below ₹5,00,000. A death claim is tax-free.

Is PPF interest tax-free?

Yes, with a limit. Interest on contributions above ₹2,50,000 a year (₹5,00,000 where the employer makes no contribution) made on or after 01/04/2021 is taxable.

Are gifts taxable?

Money or property received without consideration above ₹50,000 in a year is taxable, unless it is from a relative, on marriage, by will or inheritance, in contemplation of death, or from certain institutions.

Do tax-free incomes go in the return?

Yes. Exempt income is reported in the exempt income schedule, even though it is not taxed.

Official sources

Related reading

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.