A gratuity lumpsum amount paid by an employer to their employees as recognition for long-term service. Gratuity is governed by labour laws and is a statutory right in India.
laws are applicable to employees who have completed a minimum term of five years of continuous service in an establishment with ten or more employees. For fixed-term employees who work on a contractual basis, the government has implemented the new to ensure that they receive their gratuity after one year of continuous service.
Since gratuity is a lumpsum amount, employees often receive a large sum at the end of their service to a company. This may raise the question — is gratuity taxable?
What is gratuity?
Gratuity is a monetary benefits paid to employees by employers, but it is not part of your monthly salary. The provisions of gratuity are governed by the Payment of Gratuity Act, 1972. It is paid out on the events of superannuation, retirement, resignation, and death or disablement due to accident or disease.
Who is eligible for gratuity?
Employees who have been drawing wages as a full-time employee of an organisation is eligible for gratuity. Such employees have to draw a salary continuously for a period of five years in order to be eligible for gratuity.
Under the new labour codes implemented in November 2025, fixed term employees who have worked for one years are also eligible for gratuity.
Every individual – working in a factory, mine, oil field, port, railways, plantation, shops & establishments, or educational institution having 10 or more employees on any day in the preceding 12 months – is entitled to gratuity.
How is gratuity calculated?
The calculation for gratuity is straight forward. Here’s the formula
Gratuity = (Last Drawn Salary × 15 × Number of years of service) ÷ 26.
Here, Last Drawn Salary refers to basic salary plus dearness allowance (DA) at the time of leaving.
Is gratuity taxable?
Gratuity is exempt of taxes for government employees, meaning that they have to pay zero taxes on gratuity. However, private sector employees may have to pay taxes on gratuity.
The government in 2025 increased the tax exemption on the ceiling of gratuity from ₹10 lakh to ₹20 lakh. Any amount above ₹20 lakh received is as “Income from Salaries”.
How is gratuity taxed in India?
When one retires or resigns, the tax-exempt portion will be the least of:
(a) the actual gratuity received,
(b) ₹20,00,000,
(c) gratuity as per the formula (15/26 * last salary * years).
This means that if the gratuity amount is ₹15 lakh, it is fully tax-free. However, if your gratuity is ₹25 lakh, ₹20 lakh is exempt from taxes. The remaining ₹5 lakh will be taxed according to your income tax slab in the year of the receipt.