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Want to understand tax on gratuity? Read this complete guide

12 Feb 2025 by Team FinFIRST

tax on gratuity in India

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Received or about to get gratuity? Wondering what will be your tax implications? In India, the tax on gratuity is computed as per the various provisions of the Income Tax Act, 1961. Its taxability depends on your type of employment and the circumstances under which it's received. Confused?

In this article, let’s check out all the latest taxation rules. Also, we will learn how you can grow your gratuity amount fast with savings accounts offered by IDFC FIRST Bank.

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Latest tax rules on gratuity

Gratuity is a financial benefit. It is paid by your employer as a token of appreciation for your service. In India, the tax on gratuity amount is decided as per the various provisions of the Income Tax Act, 1961. First, let’s understand the two important scenarios –

Scenario I – Tax on gratuity received during service.

If you receive gratuity while you are still employed (not upon retirement, resignation, death, or similar reasons), the entire amount will be fully taxable
As per the Income Tax Act, 1961, the income tax on gratuity will be computed under the head “Income from Salary”

Scenario II – Tax on gratuity in case of resignation, retirement, death, etc.

This scenario covers the situation when you receive gratuity upon –

Retirement
Resignation
Death
Disablement

Now, the tax on gratuity depends on whether you are a government or private-sector employee –

Government employees

Private sector employees

Gratuity received by Central/State government employees, defence personnel, and employees of local authorities (municipalities, etc.) is fully exempt from income tax under the current laws
This exemption applies regardless of the gratuity amount

Tax exemptions for private-sector employees depend on whether they are covered under the Payment of Gratuity Act, 1972.
For employees protected under this Act, the least of the three following amounts is tax-exempt –

- Actual gratuity received

- 15 days' salary for each year of service*

- ₹20 lakhs

*Calculated as -

Applicability of ₹20 lakh exemption limit

On 8 March 2019, the Central Board of Direct Taxes (CBDT) issued Notification No. S.O. 1213 (E), which increased the maximum tax-exempt gratuity amount under Section 10(10) of the Income Tax Act from ₹10 lakh to ₹20 lakh.

However, this increased limit of ₹20 lakh applies only to employees who have received gratuity due to –

Retirement (leaving the workforce due to age)
Death
Resignation (leaving the workforce due to choice)
Disablement (loss of ability to work due to injury or illness).

Also, this new exemption limit applies to gratuity payments made for events occurring on or after 29th March 2018.

Tax on gratuity based on recipient

Tax on gratuity in India also differs based on the living status of employees –

If the employee is alive	If the employee passes away
Any gratuity beyond exemption is taxable in the hands of the employee under the head “Income from salary”.	Upon death, the gratuity is paid to the nominee or legal heirs and exempted from income tax. For them, it is treated as “Income from Other Sources” and not salary income.

Due to this variation in taxability rules, the Payment of Gratuity Act, 1972, mandates that an employee must nominate a person (nominee) to receive gratuity in case of their death. This nomination must be done after completing one year of service.

Example showing the calculation of tax on gratuity

A private-sector employee named Ramesh retired after working with a company for 20 years. Upon retirement, he received a gratuity of ₹15,00,000. During the service, his last drawn salary (Basic + DA) was ₹50,000.

Now, as per the applicable provisions, we can calculate the exemption amount as the least of the following –

₹15,00,000 (actual gratuity received)
15 days' salary for 20 Years –

- ₹50,000 × 20 years ×

- ₹5,76,923

₹20 Lakh (maximum exemption)

The lowest of the above three figures is ₹5,76,923. Hence, the taxable gratuity amount would be ₹9,23,077 [₹15,00,000 (received) − ₹5,76,923 (exempt)]. It will be taxable in Ramesh’s hand under the head “Income from salary”.

Grow your gratuity amount with savings accounts offered by IDFC FIRST Bank

Want to grow your gratuity amount fast? Keep it in a savings account offered by IDFC FIRST Bank. With it, you can enjoy high interest rates of up to 7.00% p.a. and monthly interest credits. This allows you to grow your funds faster. Also, you get a steady income that supports your regular expenses.

Moreover, all the savings accounts provided by IDFC FIRST Bank come with zero charges on all services. You even get free and unlimited ATM withdrawals. Open your account today!

Conclusion

Gratuity is a crucial financial benefit for employees and understanding tax rules on gratuity under the Income Tax Act, 1961, can help you maximise its value. To ensure your gratuity works harder for you, keep it in a savings account with IDFC FIRST Bank and become entitled to a competitive interest rate of up to 7.00% p.a. with monthly interest credits and zero charges on all services. Open your savings account today!

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.

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