Tag: Retirement benefits

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The Code on Social Security, 2020 repealed the Payment of Gratuity Act, 1972 (section 164(1)).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.

Superannuation Fund: How It Works and Tax Treatment (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 01 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • A superannuation fund is a trust set up by an employer to pay annuities or pensions to employees on retirement, incapacity or death; only an approved fund gets the tax benefits.
  • The employer’s contribution to an approved fund, together with the employer’s PF and NPS contributions, is tax free up to ₹7.5 lakh a year; anything above it is a taxable perquisite (section 17(1)(h)).
  • An employee’s own contribution is a section 123 deduction within the ₹1.5 lakh limit, in the old regime only.
  • Payments on death, and in commutation of an annuity on retirement or incapacity, are exempt (Schedule II, serial 8). A lump sum on leaving the job is taxed, with tax deducted at the average rate of the last three years.

A superannuation fund is a company pension arrangement. The employer sets up a trust, puts money into it each year, and the fund pays an annuity or pension to the employee after retirement. It is part of the cost to company (CTC) for many employees, so it matters to know what is taxed and what is not.

What the law requires of the fund

The Income-tax Act, 2025 gives benefits only to an approved superannuation fund. Under Schedule XI, Part B, the approving authority (a Commissioner) approves a fund that meets these conditions:

  • it is established under an irrevocable trust in connection with a trade or undertaking carried on in India, with at least 90% of the employees employed in India;
  • its sole purpose is to provide annuities for employees on retirement at or after a specified age, on incapacity before retirement, or for the widows, children or dependants on death;
  • the employer contributes to the fund; and
  • all annuities, pensions and other benefits are payable only in India.

The trustees apply to the Assessing Officer in Form 188 (Rule 313 of the Income-tax Rules, 2026). The income of an approved superannuation fund is itself exempt (Schedule VII, serial 23).

Types of plans

  • Defined benefit: the benefit is fixed by a formula (service, salary, age) and the employer carries the investment risk.
  • Defined contribution: the contribution is fixed and the benefit depends on what the fund earns, so the employee carries the investment risk.

At retirement the fund buys an annuity from an insurer. Common options are an annuity for life, for life with a guaranteed period of 5, 10 or 15 years, for life with return of the purchase price, or jointly for husband and wife.

Tax on the employer’s contribution

The employer’s contribution to an approved fund is not taxed in the employee’s hands, up to a combined limit. Under section 17(1)(h) the total of the employer’s contributions in a tax year to:

  1. a recognised provident fund,
  2. the pension scheme referred to in section 124(1) (the notified scheme, NPS), and
  3. an approved superannuation fund

is a perquisite only to the extent it is more than ₹7,50,000. The yearly interest, dividend or similar accretion on that excess is also a perquisite (section 17(1)(i), worked out under Rule 16).

Example: the employer pays ₹4,00,000 into the provident fund, ₹2,50,000 into NPS and ₹2,00,000 into the superannuation fund in the year. The total is ₹8,50,000. ₹1,00,000 is taxable as a perquisite.

If the employer instead pays a life insurance premium or buys an annuity for you, it is taxable as a perquisite, except where it goes to an approved superannuation fund, a recognised provident fund or the deposit-linked insurance fund (section 17(1)(g)).

Tax on the employee’s contribution

The employee’s own contribution to an approved superannuation fund is one of the items that qualify under section 123 (paragraph 1(g) of Schedule XV). With the other qualifying items such as provident fund and life insurance it must stay within ₹1,50,000. Section 202(2) bars Chapter VIII deductions in the new regime, so this deduction is available only in the old regime.

Tax on the money paid out

Payment Treatment
Paid on the death of a member Exempt
Lump sum in lieu of or in commutation of an annuity on retirement at or after the specified age, or on incapacity before retirement Exempt
Refund of contributions on the death of a member Exempt
Refund of contributions to an employee leaving service otherwise than by retirement or incapacity Exempt only up to contributions made before the Act’s commencement and interest on them, so in practice taxable
Transfer to the employee’s account in the notified pension scheme (NPS) Exempt
Annuity or pension received later Taxable as salary (section 16(b))
Employer’s contribution and interest paid to the employee on leaving service Taxable as profits in lieu of salary (section 18(1)(c)(ii)), with tax deducted by the trustees at the average rate of the previous three years (Schedule XI, Part B, paragraph 7)

The exempt payments are listed at serial 8 of Schedule II.

The trustees must report to the tax department each such payment made during an employee’s lifetime, within two months of the end of the financial year, giving the contribution repaid and the tax deducted.

What the employer gets

The employer’s contribution to an approved superannuation fund is deductible as an expense of business (section 29(1)(a)), subject to the limits the rules set for approval. The employer also reports its payments to the fund in the salary statement (Schedule XI, Part B, paragraph 8).

Superannuation or retirement

They are not the same thing. Retirement is leaving work at a certain age. Superannuation is a fund that helps pay for life after that.

Before you rely on this

  • Whether a payout is “in commutation of an annuity” depends on the fund rules and the insurer’s documents. Ask for a written note of how the payment is described.
  • The refund of contributions on leaving service (serial 8(d)) is exempt only up to contributions made before the Act’s commencement, so check how your fund’s payout is split between your own and the employer’s money.

Frequently asked questions

What is a superannuation fund?

A trust set up by an employer, usually with an insurer, to provide annuities or pensions to employees on retirement at a specified age, on incapacity before retirement, and to dependants on death. The employer must contribute to it.

Is the employer’s contribution taxable for the employee?

Not up to ₹7.5 lakh in a tax year. That limit covers the employer’s contributions to a recognised provident fund, the notified pension scheme (NPS) and the approved superannuation fund together. The excess, and the yearly interest or dividend on it, is a taxable perquisite.

Can I claim the employee’s contribution as a deduction?

Yes, under section 123 (Schedule XV, paragraph 1(g)) within the overall limit of ₹1,50,000 with the other qualifying items, but only in the old tax regime.

Is the pension from a superannuation fund taxable?

An annuity or pension is salary (section 16(b)) and is taxed when received. The lump sum paid in commutation of an annuity on retirement at or after the specified age, or on incapacity, is exempt.

What if I leave the job and withdraw the money?

The employer’s contribution and interest paid to you during your lifetime on leaving service is taxable, and the trustees deduct tax at the average rate you paid over the previous three years (or your period in the fund if shorter). Your own contribution is not taxed again.

Is a fund approved automatically?

No. The trustees apply to the Assessing Officer in Form 188 and the approving authority (a Commissioner) grants approval if the fund satisfies the conditions in Schedule XI, Part B of the Act. Only an approved fund gets the benefits described here.

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.