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LoadingTax exemption, least of
The ₹20 lakh ceiling is a lifetime limit across all employers, and the exemption survives in both tax regimes. Government employees are fully exempt.
It applies the Payment of Gratuity Act formula and then works out the Section 10(10) exemption, which are two different calculations that get conflated. The first tells you what your employer owes. The second tells you how much of it reaches you after tax.
Enter your last drawn basic plus DA, not gross and not CTC. This is the single most common input error, and it inflates the result by two or three times.
For an establishment covered by the Act, which means 10 or more employees and so nearly every company you would work for:
Gratuity = 15/26 × last drawn basic + DA × completed years of service
The 15/26 is 15 days of wages for each year of service, with a month treated as 26 working days. That works out to roughly 57.7% of one month's basic + DA for every year you served.
Two details the formula hides:
Gratuity scales directly with basic and nothing else. Two offers with the same CTC can differ by lakhs at exit:
| Basic (monthly) | Gratuity after 10 years |
|---|---|
| ₹40,000 | ₹2,30,769 |
| ₹60,000 | ₹3,46,154 |
| ₹80,000 | ₹4,61,538 |
A structure with basic at 30% of gross quietly costs you here, in your PF, and in your HRA exemption at once. The offer letter traps guide covers what else hides in the annexure.
The exempt amount is the least of the gratuity received, the formula amount, and ₹20 lakh. That ceiling is a lifetime limit across every employer you have ever had, not a per-job allowance.
Two consequences worth knowing:
For most people with a normal basic and a normal tenure the entire amount is tax free. It starts to bite at long tenures on high basics.
Five years of continuous service is the threshold, and approved leave does not break continuity. The rule is waived on death or disablement. If you are at four and a half years and weighing an exit, the arithmetic above is worth running before you resign: a few more months can be worth a lakh or more.
The full rules, including what happens to gratuity when a company is sold and how nomination works, are in the gratuity rules guide.
For establishments covered by the Payment of Gratuity Act, 1972, gratuity is 15/26 × last drawn basic + DA × completed years of service. The 15/26 means 15 days of wages for every year, treating a month as 26 working days, so each year earns roughly 57.7% of a month's basic. Service of more than 6 months in the final year rounds up to a full year.
Five years of continuous service with the same employer. The requirement is waived in the case of death or disablement, when the payment goes to the employee or their nominee regardless of tenure. Some employers honour the '4 years and 240 days' reading that courts have accepted in several cases, but treat that as something to verify rather than a guarantee.
On basic salary plus dearness allowance only, as of your last drawn month. Not gross, not CTC. This is one more reason a low basic hurts: two offers with identical CTC can produce very different gratuity if one sets basic at 30% of gross and the other at 50%.
For private-sector employees the exemption is the least of three amounts: the gratuity actually received, the amount the 15/26 formula produces, and ₹20 lakh. The ₹20 lakh is a lifetime ceiling across all employers, not per job. Anything above the exempt figure is taxed as salary at your slab rate. Government employees are fully exempt.
The exemption survives in both regimes. Unlike HRA and 80C, the Section 10(10) gratuity exemption is not one of the deductions the new regime removes, so the same ₹20 lakh ceiling applies whichever regime you are on.
Not under the Act. Gratuity becomes payable only after five years of continuous service, so resigning at four years and eleven months generally means nothing is payable. Company schemes can be more generous than the Act but never less, so check your policy before timing an exit.