BooksIQGovernment employees: gratuity fully exempt. Employees covered by the Payment of Gratuity Act: least of actual gratuity, (15/26 × last drawn salary × completed years), or ₹20,00,000. Not covered: least of actual, (½-month avg salary × years), or ₹20,00,000. ₹20 lakh is a lifetime cap.
Key points
- §10(10) exempts gratuity received as follows.
- (i) GOVERNMENT employees — FULLY EXEMPT.
- (ii) Employees COVERED by the Payment of Gratuity Act 1972 — exempt to the LEAST of: actual gratuity;
- (15/26) × last drawn salary (Basic + DA) × number of completed years of service (any part over 6 months counts as a full year);; or ₹20,00,000.
- (iii) Employees NOT covered by the Act — least of: actual;
- (1/2) × average salary of last 10 months × completed years (ignoring part years);; or ₹20,00,000.
- The ₹20 lakh ceiling is a LIFETIME aggregate across employers.
- ELIGIBILITY under the Payment of Gratuity Act: 5 years of continuous service (relaxed on death/disablement).
- Excess over the exempt amount is taxable as salary (relief under §89 may apply).
Reference: §10(10) ITA 1961 read with Payment of Gratuity Act 1972 — under ITA 2025 (FY 26-27 onwards), this is §19
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