Gratuity up to Rs. 20 lakhs tax free.. What are the new rules? Check it Out
Gratuity Tax: In our India, a job represents more than just a monthly paycheck. It also serves as a promise for the future. One such promise is gratuity. Gratuity is a significant sum paid by the company when an employee…
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Gratuity Calculation
Gratuity Tax: In our India, a job represents more than just a monthly paycheck. It also serves as a promise for the future. One such promise is gratuity. Gratuity is a significant sum paid by the company when an employee retires or leaves their job after years of service.
This provision was established under the Gratuity Payments Act of 1972. However, as times have evolved, labor laws have also been updated. The central government has raised the tax exemption limit, particularly to offer substantial relief to middle-class workers. Previously, the tax-free limit was set at Rs. 10 lakhs, but it has now been increased to Rs. 20 lakhs.
An employee who has dedicated many years to their work can find relief from tax burdens when receiving a large sum at retirement. This applies to all employees, whether they work in the private sector or for the government. It encompasses everyone, from ordinary workers to middle-class individuals with family obligations.
Nonetheless, under the new labor law that will soon take effect, fixed-term employees will qualify for gratuity after just one year of service. The existing five-year requirement for regular employees will remain unchanged. This regulation will be applicable to all establishments that have 10 or more employees at any point in the last 12 months.
No tax up to Rs. 20 lakhs
Is income tax applicable on gratuity? The answer is that it depends on the amount you receive. In 2025, the government raised the tax exemption limit from Rs. 10 lakh to Rs. 20 lakh.
No tax on gratuity amount:
For Private Employees: Your gratuity is determined by three factors. The actual amount you receive will be either the government’s limit of Rs. 20 lakh or the amount calculated using the formula, whichever is lower. That amount will be exempt from tax. For instance, if you receive Rs. 25 lakhs, the first Rs. 20 lakhs will be tax-exempt. Only the remaining Rs. 5 lakhs will be taxed according to your income.
How to calculate your gratuity?
Add your last basic pay and DA. Multiply it by 15. Then multiply by the number of years you have worked and finally divide by 26. Where 26 represents the number of working days in a month. 15 represents 15 days of salary for each year of service. If the amount generated from this formula is up to Rs. 20 lakhs, you do not have to pay any tax. You can get your entire savings.
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