Gratuity exemption (Section 10(10))

A gratuity is a thank-you payment for long service, paid on retirement, resignation, incapacity or death. Not all of it is automatically tax-free.

Section 10(10) of the Income Tax Act sorts employees into three groups, and each group gets a different exemption rule. The rule is the same under the old and the new tax regime.

Government employees. Any death-cum-retirement gratuity received by a Central Government, State Government or local authority employee is fully exempt, with no ceiling at all.

Employees covered by the Payment of Gratuity Act. Exempt up to the least of: 15 days' salary, based on the salary last drawn, for every completed year of service; Rs 20,00,000; or the gratuity actually received.

Everyone else — not covered by that Act. Exempt up to the least of: half a month's salary for each completed year of service; Rs 20,00,000; or the gratuity actually received.

The difference between the second and third group is the fraction of a month's salary used per year of service — 15 days against half a month — which changes the computed exemption even when every other figure is identical.

Illustrative figures. Mr Bhosale, covered by the Payment of Gratuity Act, retires after 22 completed years of service, with a last-drawn salary of Rs 60,000 a month. His employer pays him a gratuity of Rs 9,00,000.

15 days salary per year    = (60,000 x 15 / 30) x 22 = Rs 6,60,000
Statutory ceiling          = Rs 20,00,000
Gratuity actually received = Rs 9,00,000

Exemption = least of the three = Rs 6,60,000
Taxable gratuity = 9,00,000 - 6,60,000 = Rs 2,40,000

Had Mr Bhosale instead been a Central Government employee retiring on the same terms, the entire Rs 9,00,000 would have been exempt, with none of this computation needed at all.

Chapter 7 (Concepts of Taxation), the salary deductions and exemptions table in section 7.6.1, sets out this three-way gratuity exemption alongside House Rent Allowance and the other salary deductions. Expect a computation question that gives years of service, last-drawn salary and gratuity received, and asks for the taxable balance.

• Government employees get an unlimited exemption; everyone else is capped, however small their gratuity.
• 15 days' salary applies only where the Payment of Gratuity Act covers the employee; otherwise the fraction is half a month's salary — using the wrong fraction changes the answer.
• The exemption is the least of three figures, not their sum or average.
• Rs 20,00,000 is a lifetime ceiling across employers, not a per-employer allowance.