Published 9 May 2026
Sub-clause (10) of section 10 of the Income-tax Act, 1961 -- the full exemption for government employees; the three-limb minimum-of test for non-government Payment of Gratuity Act-covered employees with the Rs 20 lakh ceiling; the four-limb test for non-covered employees; the lifetime aggregate cap; and the practitioner's structuring around employer change-overs
Taxpayer Brief
Gratuity is the lump-sum 'thank you' paid by an employer to an employee for long service, usually on retirement, resignation, death or disablement. Sub-clause (10) of section 10 of the Income-tax Act, 1961 prescribes the exemption framework -- which is dramatically different for government employees (full exemption without limit) and for private-sector employees (limited exemption with statutory ceilings). The Finance Act, 2024 raised the ceiling for non-government employees from rupees twenty lakh to rupees twenty-five lakh effective from Tax Year 2024-25 onwards -- a four-fold revision over the rupees ten lakh ceiling that prevailed until 2018. This article walks through the three exemption sub-frameworks (government, Payment of Gratuity Act-covered, non-covered), the lifetime-aggregate cap, the worked computation, and the practitioner's structuring.
Complexity Matrix
Feature | Complexity Level | Primary Risk |
|---|---|---|
Government employee retirement gratuity | Low | Fully exempt under sub-clause (10)(i) of section 10 |
Private-sector employee covered by Payment of Gratuity Act, 1972 | Medium | Three-limb minimum-of test with Rs 25 lakh cap |
Private-sector employee not covered by Payment of Gratuity Act | High | Four-limb minimum-of test; different formula |
Multi-employer career with cumulative gratuity receipts | Very High | Lifetime aggregate cap; per-employer tracking |
1. The Three Sub-Frameworks under Sub-Clause (10) of Section 10
Sub-Clause | Class of Employee | Exemption |
|---|---|---|
10(10)(i) | Government employees -- Central, State, local authority | Fully exempt without limit |
10(10)(ii) | Non-government employees covered by the Payment of Gratuity Act, 1972 | Lower of -- (a) actual gratuity received; (b) ₹25 lakh aggregate lifetime; (c) 15 days' last-drawn salary × completed years of service / 26 |
10(10)(iii) | Non-government employees NOT covered by the Payment of Gratuity Act, 1972 | Lower of -- (a) actual gratuity received; (b) ₹25 lakh aggregate lifetime; (c) Half month's average salary × completed years of service |
The 2024 ceiling revision The exemption ceiling for non-government employees stood at rupees ten lakh from 2010 to 2018, was raised to rupees twenty lakh by Notification No. SO 1213(E) effective 29 March 2018, and was further raised to rupees twenty-five lakh by the Finance Act, 2024 effective from Tax Year 2024-25 onwards. The ceiling is a LIFETIME aggregate -- it is not refreshed for each employer. An employee who received rupees fifteen lakh gratuity from a previous employer in 2020 and rupees twelve lakh from a current employer in 2025 has an aggregate of rupees twenty-seven lakh -- only the rupees twenty-five lakh first received is exempt; the rupees two lakh excess is fully taxable. |
2. The 15-Days-Per-Year Formula -- Payment of Gratuity Act Coverage
For Payment of Gratuity Act-covered employees, the third limb is computed as -- (15 days' last-drawn salary / 26 days) × number of completed years of service. The 'salary' for this formula is basic salary plus dearness allowance (without other allowances). The '26 days' divisor reflects the 6-day working week assumption. A part-year service of 6 months or more is treated as a full year; less than 6 months is rounded down.
Case Law Reference: Supreme Court of India in CIT v. Smt R.N. Aggarwal (1969) and subsequent gratuity-formula authorities The Supreme Court has repeatedly held that the gratuity exemption formula is a strict mathematical computation -- the assessee cannot claim the higher of multiple alternative formulae. The lower of the three limbs governs; the year-rounding rule for periods of 6 months and above applies; the 'salary' for the formula is strictly basic plus dearness allowance. [VERIFY: confirm specific Supreme Court citations and recent ITAT decisions on gratuity formula application.] |
3. Worked Example -- Private-Sector Manager After 30 Years
Mrs. Lalita retired in March 2026 from a private-sector multinational after 30 years of continuous service. Last drawn basic salary plus dearness allowance: rupees one lakh fifty thousand per month. Gratuity received: rupees thirty-eight lakh. Employer is covered by the Payment of Gratuity Act, 1972.
Limb | Computation | Amount (₹) |
|---|---|---|
(a) Actual gratuity received | Per appointment letter and payment slip | 38,00,000 |
(b) Lifetime aggregate ceiling under section 10(10)(ii) | ₹25 lakh | 25,00,000 |
(c) Formula -- 15 days' salary × 30 years / 26 | (₹1,50,000 × 15 ÷ 26) × 30 = ₹86,538 × 30 | 25,96,154 |
Lower of (a), (b), (c) | Limb (b) governs at ₹25 lakh | 25,00,000 |
Exempt under sub-clause (10)(ii) of section 10 | 25,00,000 | |
Taxable as Salary in Tax Year 2025-26 | ₹38L − ₹25L | 13,00,000 |
Section 89 relief -- spread the ₹13 lakh over the 30 service years (RET-06) | Form 10E mandatory; substantial saving possible | Computation per Rule 21A |
Why section 89 relief matters here Mrs. Lalita's ₹13 lakh taxable gratuity, taxed at her current-year slab (likely 30% bracket plus surcharge plus 4% Cess), produces tax of approximately ₹4 lakh. With section 89 relief spreading the ₹13 lakh notionally across her 30 service years, the imputed marginal rates of those earlier years (when her salary and slab were lower) reduce the aggregate tax materially -- often to half the current-year cliff. RET-06 covers the section 89(1) magic-wand mechanics in detail. |
4. The Lifetime-Aggregate Cap Trap
Sub-clause (10)(ii) and (iii) of section 10 specify that the rupees twenty-five lakh ceiling is 'the aggregate amount of such gratuity received from one or more employers in the same or different previous years'. An employee changing jobs and receiving partial gratuity (typically on resignation after 5 years) consumes the ceiling proportionately. By the time of final retirement, only the residual ceiling is available.
Career Pattern | Lifetime Cap Consumption |
|---|---|
First employer (5 years), gratuity ₹3 lakh on resignation | ₹3 lakh consumed; ₹22 lakh residual |
Second employer (10 years), gratuity ₹8 lakh on resignation | Aggregate ₹11 lakh consumed; ₹14 lakh residual |
Third employer (15 years), gratuity ₹15 lakh on retirement | Total received ₹26 lakh; only ₹14 lakh residual exempt; ₹1 lakh excess fully taxable |
5. Death and Disablement Gratuity
Sub-clause (10) of section 10 applies equally to gratuity received by the legal heirs / nominees on the death of the employee, and on disablement of the employee. The formula computation is the same; the recipient claims the exemption in his / her own Income Tax Return. Where the gratuity is received as a lump sum on death, no section 89 relief is available to the heir (since the heir has no service period of his / her own); the heir simply offers the taxable portion at his / her own slab rate in the year of receipt.
6. The Income-tax Act, 2025 Treatment
The Income-tax Act, 2025 carries forward the same architecture in its corresponding provision. The three-sub-framework structure, the formula computation, the lifetime aggregate cap, and the rupees twenty-five lakh ceiling all carry over. Practitioners should cite the new section number in correspondence post Tax Year 2026-27.
7. Practitioner Documentation Discipline
- Appointment letter / employment terms confirming Payment of Gratuity Act coverage.
- Payslips for the last drawn basic + dearness allowance computation.
- Service-certificate confirming continuous years of service.
- Gratuity payment letter / Form L from employer.
- Lifetime-aggregate working showing per-employer gratuity history.
- Section 89 / Form 10E filing for spreading the taxable portion (RET-06).
- Income Tax Return Schedule S entry; supporting computation in client file.
8. Key Takeaways
- Sub-clause (10) of section 10 has three sub-frameworks -- government employees fully exempt; PoGA-covered employees with three-limb test; non-covered employees with four-limb test.
- Rs 25 lakh lifetime aggregate ceiling under sub-clauses (10)(ii) and (10)(iii) effective from Tax Year 2024-25 (Finance Act, 2024 revision).
- Lifetime cap is per-employee, not per-employer -- multi-employer careers consume cap progressively.
- Formula computation -- 15 days' salary × completed years / 26 (PoGA-covered); half-month's average × years (non-covered).
- Section 89 relief through Form 10E spreads the taxable excess across service years -- often halves the cliff-edge tax.
- Death / disablement gratuity follows the same exemption framework but section 89 unavailable to heirs.
Disclaimer: This article is for general information only. It does not constitute tax / legal advice. Please consult a qualified Chartered Accountant or tax practitioner for advice specific to your circumstances. The legal position is current as of FA 2024 (No. 2) / FA 2025; subsequent amendments and CBDT notifications may modify the position.