Gratuity Tax Exemption Private Sector Section 89 - citizen guide 2026

You retired after 22 years, your old firm paid ₹14 lakh gratuity, and now you are scared the income tax department will eat half of it. Here is the plain truth: most private-sector gratuity is fully tax-free, and even when part is taxable, Section 89(1) relief can shrink the extra tax to almost nothing.

Gratuity is the lump sum your employer pays for long service when you retire, resign, or are let go. For private staff the law does not tax the whole amount. Section 10(10) of the Income Tax Act exempts a calculated slice. Only the portion above that exempt slice is added to your salary income and taxed at your slab rate for that year.

Three laws work together here.

• Payment of Gratuity Act 1972 decides who is entitled to gratuity and fixes the 15-days-per-completed-year payout formula. It covers establishments with 10 or more employees, which is most private firms.
• Section 10(10) of the Income Tax Act 1961 decides how much of that gratuity is tax-free. The lifetime exemption ceiling for non-government employees was raised from ₹10 lakh to ₹20 lakh for events on or after 29 March 2018, confirmed by CBDT Notification No. 16/2019 dated 8 March 2019.
• Section 89(1) of the Income Tax Act, read with Rule 21A and Form 10E, gives relief when a lump sum such as taxable gratuity for past services pushes you into a higher slab in the year you receive it.

Important regime note: Section 10(10) is an exemption, and Section 89(1) is a relief, not Chapter VI-A deductions like 80C. The new tax regime, which is the default from FY 2023-24, removes most 80C-type deductions but keeps the Section 10(10) gratuity exemption and Section 89(1) relief. So you get this benefit whether you are on the old regime or the new default regime.

Government employees, for contrast, get gratuity that is fully exempt under Section 10(10)(i). There is no ₹20 lakh cap on them. This guide is for private-sector and other non-government staff.

1. Confirm if you are covered by the Payment of Gratuity Act. Almost all private firms with 10 or more employees are covered. Coverage decides which formula you use.
2. For COVERED employees, run the least-of-three. The exempt amount is the lowest of: (i) actual gratuity received, (ii) ₹20 lakh lifetime cap, (iii) last drawn monthly salary (basic + DA) × 15/26 × number of completed years. Here any part of a year over 6 months counts as a full year.
3. For NOT-covered employees, use the half-month formula. The exempt amount is the lowest of: (i) actual gratuity, (ii) ₹20 lakh, (iii) half-month average salary (basic + DA, of the last 10 months) × number of completed years. Here any fraction of a year is ignored, not rounded up.
4. Subtract the exempt slice from the gratuity received. The balance is taxable and forms part of your salary income for that year.
5. Check the lifetime cap. The ₹20 lakh ceiling is cumulative across your whole working life and across all employers. If you already used ₹8 lakh of exemption at an earlier job, only ₹12 lakh is left.
6. File Form 10E online if you want Section 89(1) relief. Log in to the income tax e-filing portal, go to e-File then Income Tax Forms, pick Form 10E, choose the assessment year, and complete Annexure II or IIA for gratuity for past services. Form 10E is online only and must be filed before you file your ITR.
7. Report it in your ITR. Show the taxable gratuity under salary income, claim the Section 10(10) exemption amount, and enter the Section 89 relief figure in the relief field. If you skip Form 10E, the ITR is processed but the relief is disallowed.

Need help drafting an information request to your old employer or the labour office about your gratuity dues? Try the AI RTI Drafter.

• Gratuity payment letter or settlement statement from the employer
• Form 16 showing salary and any gratuity already taxed
• Salary slips showing basic pay plus dearness allowance
• Proof of date of joining and date of leaving, to count completed years
• Records of any earlier gratuity received, to track the ₹20 lakh lifetime cap
• Bank statement showing the gratuity credit

• Assuming all gratuity is tax-free. Only the Section 10(10) exempt slice is. The balance is taxable salary.
• Forgetting the ₹20 lakh cap is a lifetime cumulative limit across employers, not a fresh ₹20 lakh at each job.
• Using the wrong formula. Covered employees use 15/26 with 6-months rounding up. Not-covered employees use the half-month formula with fractions ignored.
• Claiming Section 89(1) relief in the ITR but not filing Form 10E first. The relief is then disallowed and you may get a notice.
• Thinking the new tax regime kills this benefit. It does not. Section 10(10) and Section 89 survive in both regimes.
• Counting your full last salary instead of only basic plus dearness allowance in the formula.

To: HR / Payroll Department
Subject: Request for gratuity computation breakup for ITR and Form 10E

Dear Sir or Madam,

I am requesting a written breakup of the gratuity paid to me
on [date], so I can correctly claim the Section 10(10) exemption
and, if needed, Section 89(1) relief through Form 10E.

Please confirm:
1. Total gratuity amount paid and the date of payment.
2. Whether our establishment is covered by the
   Payment of Gratuity Act 1972.
3. My last drawn basic pay plus dearness allowance.
4. My total years of completed service used in the calculation.
5. The Section 10(10) exempt amount and the taxable balance,
   if any, reported in my Form 16.

Kind regards,
[Name, employee ID, contact]

No. It is exempt under Section 10(10) only up to the least of three amounts: the actual gratuity, the ₹20 lakh lifetime cap, or the 15-days-per-year formula. Any excess is taxable salary.

The lifetime cap is ₹20 lakh, raised from ₹10 lakh for events on or after 29 March 2018, per CBDT Notification No. 16/2019. It is cumulative across all employers in your working life.

Yes. Section 10(10) is an exemption and Section 89(1) is a relief, not Chapter VI-A deductions. Both apply in the old regime and in the new default regime.

Yes. Form 10E is online only and must be filed before you file your return. If you claim Section 89 relief without filing Form 10E, the ITR is processed but the relief is disallowed.

No. Gratuity received by central, state, defence and local-authority employees is fully exempt under Section 10(10)(i), with no ₹20 lakh cap. This contrasts with private-sector treatment.

Only basic pay plus dearness allowance, not your full cost-to-company. Covered employees use the last drawn monthly figure, while not-covered employees use the average of the last 10 months.

For employees covered by the Payment of Gratuity Act, any part over 6 months counts as a full year. For not-covered employees, any fraction of a year is ignored and only completed years count.

• Income Tax Act 1961, Section 10(10) and Section 89(1), via the RTI and statute reference and incometax.gov.in
• CBDT Notification No. 16/2019 dated 8 March 2019, raising the gratuity exemption ceiling to ₹20 lakh
• Payment of Gratuity Act 1972
• Income Tax Department Form 10E user manual and FAQ, incometax.gov.in

• AI RTI Drafter to request gratuity records from an employer or labour office
• The RTI Act 2005 full text
• The RTI Playbook