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Code on Social Security, 2020 and section 19 of the Income-tax Act, 2025. Reviewed 27 September 2026.
Tax-free part is the least of
₹0 is taxable as salary.
The ₹20 lakh ceiling is a lifetime limit across employers, and the exemption applies in both regimes. Government employees are fully exempt.
It applies the gratuity formula, then works out how much of the payment is tax-free. Those are two different questions that often get mixed up: the first is what your employer owes, the second is what reaches you after tax.
Enter your last drawn wages: basic plus DA, not gross and not CTC. That is the most common input mistake and it inflates the answer two or three times. The one exception is the labour codes' 50% rule, below.
Gratuity = 15/26 × last drawn wages × years of service
The 15/26 is 15 days' wages for each year, with a month taken as 26 working days, so each year earns about 57.7% of one month's wages. Two details:
The Code on Social Security came into force on 21 November 2025 and replaced the Payment of Gratuity Act. The formula survived. Three things changed around it:
The full picture, including what happens to PF and your take-home, is in how the labour codes change your salary.
Gratuity scales with wages and nothing else, so two offers with the same CTC can differ by lakhs at exit:
| Wages (monthly) | Gratuity after 10 years |
|---|---|
| ₹40,000 | ₹2,30,769 |
| ₹60,000 | ₹3,46,154 |
| ₹80,000 | ₹4,61,538 |
A structure with a low basic costs you here, in PF and in HRA at the same time.
The tax-free part is the least of the gratuity received, the formula amount and ₹20 lakh, a lifetime limit across every employer. Two things follow:
For permanent staff, five years of continuous service is the line, and approved leave does not break it. If you are at four and a half years and weighing an exit, run the numbers first: a few more months can be worth a lakh or more. The gratuity rules guide covers nomination, company sales and disputes.
15 days' wages for every completed year of service, using the wages you last drew. With a month taken as 26 working days that is 15/26 of a month's wages per year, about 57.7%. Service of more than six months in the final year counts as a full year. The Code on Social Security, in force since 21 November 2025, kept this formula.
Five years of continuous service for permanent employees. The five-year rule does not apply on death, disablement or the end of a fixed-term contract; fixed-term staff get gratuity pro-rata, and the Labour Ministry says one year of service qualifies.
On wages, which the labour codes define as basic pay, dearness allowance and retaining allowance. If your other allowances are more than half of your total pay, the excess is added back to wages. Performance incentives, ESOPs and reimbursements are left out.
For private-sector employees, the least of the gratuity received, the formula amount and ₹20 lakh. The ₹20 lakh is a lifetime limit across every employer. Anything above it is taxed as salary. Government employees are fully exempt.
The exemption works in both regimes. It sits in section 19 of the Income-tax Act, 2025 (the old section 10(10)), which the new regime does not take away.
The Labour Ministry says the Code's gratuity provisions apply from 21 November 2025, the day it came into force. Your years of service before that still count towards the five years and the formula.