Gratuity is a gratuity, or farewell pay, given to employees by their employers in gratitude for the employee’s extended service for a worthy cause. The gratuity changes hands upon retirement, resignation, or upon the event of death or disability. Many rules got further covered in 2025 with respect to income tax on gratuity to offer greater financial relief to employees across sectors.
Tax-Free Limit Raised to ₹20 Lakh
In the recent changes, after Section 10(10) of the Income Tax Act has been amended in this regard, it is noteworthy that the gratuity received by employees is now tax-free up to ₹20 lakhs. This is after a spectacular raise from earlier ₹10 lakhs. The exemption applies to an employee who retires, resigns, or who has been paid gratuity because of death or because of being recognized as disabled. This consequently works to the advantage of both government and private sector employees, particularly those who have served for an extended period of time.
Who Is Eligible for Tax-Free Gratuity?
Gratuity is payable to an employee who has completed five years of continuous service with an employer. The said condition of five years is waived in cases of death or disability. The Payment of Gratuity Act, 1972, applies to employees working in factories, shops, educational institutes, and other establishments where more than ten workers are employed. When once an organization falls under this Act, it will continue to remain under the purview even if the number of employees falls below ten.
How Is Gratuity Tax Calculated?
The portion of gratuity exempted from tax is calculated based on the following formula:
Gratuity = Last drawn salary × 15/26 × Years of service It is the least of the following amounts that is exempt from income tax: – ₹20 lakh
- – Actual gratuity received
- – Amount calculated using the above formula
To explain, say an employee who gets a wage of ₹1 lakh a month and who has undergone a 20-year service gets a gratuity amounting to ₹11 lakhs. This will be completely exempt from taxes since this amount is less than the ceiling of ₹20 lakh.
Gratuity for Fixed-Term and Gig Workers
Gratuity may potentially be claimed by fixed-term employees and gig workers under the new rules laid down under the Code on Social Security, 2020. Gratuity is payable to fixed-term employees on a proportional basis if the fixed term is one year or longer, even if the employee has served for less than five years. This extension provides coverage to many, bringing additional workers under the tax-free category for gratuity.
In return, gratuity offers more financial safety and tax relief for India’s growing workforce in 2025 due to the rise in exemption level and more extended eligibility.
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