Gratuity is an important part of an employee’s long-term financial security. However, it is still overlooked in day-to-day salary discussions. So whether you are a new employee or an employee who is nearing their retirement days, having an understanding of gratuity will help the employee in planning a better future. In this blog, we will come across terms that are used for Gratuity, along with understanding the concepts associated with it. This blog will also include an explanation of how Gratuity works in the context of Indian Income Tax as of 2025. It will also provide the latest updates, including the limits of exemption and tax implications.
Gratuity Meaning and Gratuity Definition
The basic meaning of Gratuity is, it refers to a lump sum amount whose payment is made by the employer to the employee in recognition of their continuous service over a certain period. This monetary benefit is governed by the Payment of Gratuity Act, 1972, in India.
The definition of Gratuity goes like: It is a statutory retirement advantage that is paid to employees who have provided continuous service of a minimum of five years with the same employer. This amount is generally reimbursed to the employee by the employer when they put in a resignation, retirement or in unforeseen situations like death or disability.
Why Is Gratuity Paid?
Gratuity is enacted as an appreciation shown by the employers to the employees who have served in a single organisation for more than 5 years. It acts like a financial cushion for the employees when they resign from their jobs or retire from their services. Lawfully, companies with more than 10 employees are obliged to pay gratuity to the eligible staff.
The employers are required to pay for the Gratuity as part of the total compensation package. The employees, in turn, are qualified to receive the amount collected once they have met the minimum service requirement. It promotes loyalty, retention and also long-term employee engagement.
Gratuity and Income Tax
Understanding the meaning of Gratuity in Income Tax is very important to handle the expectations and financial planning. Even though Gratuity is a retirement benefit that the employees gain, its treatment under the Income Tax Act will determine the amount that will be added to an individual’s taxable income.
For the government employees, the whole gratuity amount is spared from tax. However, for a private-sector employee, this spared facility depends on several criteria which includes weather the employer is covered under the Payment of Gratuity Act or not.
Is Gratuity Taxable?
A very frequently asked question is: Is gratuity taxable? The answer always relies on the employment type and the amount received.
- Government employees: Gratuity is fully spared from tax.
- Private sector employees covered under the Act: The very bare minimum is spared from the following:
- ₹20 lakhs as per the latest updates.
- Actual gratuity received,
- 15 days’ wages for each year of completed service which is based on the last drawn salary.
- Private employees are not covered under the Act: The calculation for the private sector employees varies, but a similar excuse of logic applies.
The remaining amount, if any, becomes taxable under the heading “Income from Salary.”
Gratuity Exemption Limits in 2025
The Gratuity excused limit is an important detail for tax planning. As of 2025, the gratuity tax spared limit stands at Rs. 20 lakhs, following the 2019 amendment by the government of India. This limit only applies to a private-sector employee who qualifies under the Payment of Gratuity Act. For the government employees, the entire gratuity amount is excused from tax. However, for an employee who is working in the private sector, the excuse depends on several criteria, which include whether the employer is covered under the Payment of Gratuity Act or not.
This threshold is a lifetime limit, meaning it applies collectively to all gratuity received during a person’s career. If you’ve received gratuity from more than one employer, all such payments are added up to determine whether you’ve crossed the exemption cap.
Understanding Gratuity Tax-Free Limit
It is very important to know what the gratuity tax exemption is available for you and how it is gratuity calculated, to understand your tax liability. The Gratuity Tax-free limit is set on many factors, such as the duration of the service, the salary structure and whether the employee is covered under the boundaries of the Gratuity Act.
Let’s answer the big and the commonly asked question: How much gratuity is tax free?
Example:
If an employee retires after 30 years of service and has earned a last drawn basic salary + dearness allowance of ₹90,000, then:
Gratuity = 15/26 × ₹90,000 × 30 = INR 15,57,692.31
Since INR 15,57,692.31 < ₹20,00,000, the entire gratuity is tax-free.
However, if this amount would be ₹24 lakhs, then INR 4 lakhs would be the added amount to the taxable income.
Recent Changes and Budget Updates
Following the 2025 Union Budget discussion and declarations, there were no major changes to the gratuity tax exemption limit. The INR 20 lakh cap is still continuing to be the benchmark. However, the ongoing discussion about the indexing of this amount to inflation, specially for the high-earning working professionals in the private sector.
In addition, the government of India is working towards bringing more transparency and automation to the gratuity payment and taxation process through portals like the E-Shram platform and the employer payroll integration systems.
It is always good enough to stay updated on these matters through the government circulars or taking consultation of the most recent legal and procedural updates.
Conclusion
The Gratuity is not just a financial benefit after retirement. It is a symbol of an employee’s dedication and loyalty towards the employer’s recognition of working and providing services for long-term service. So whether you are planning your financial future or preparing for retirement, knowing the rules and limits surrounding the gratuity is important.
To have a quick summary of the blog:
- The gratuity is paid after the employee has completed 5 years or more of service.
- The Gratuity amount also has tax implications based on the employment type. This means that if the employee is working in the public sector (government) is tax-free; however, if the employee is working in the private sector, then, according to the total amount of gratuity, tax is applied.
- The Gratuity exemption limit as of 2025 is INR 20 lakhs.
- Knowing how much gratuity is tax-free helps in avoiding surprises during the tax season.
For having an easy calculation of Gratuity for employees who have served more than 5 years within the same company, the companies have started adapting to HRMS software, which helps the company in managing its HR functions and also in recording details about their employees. One such HRMS platform is DoInsights. DoInsights is one of India’s leading HRMS software, which has helped the companies in managing their HR functions and also in keeping all the details of the employees on a single dashboard.
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