## Gratuity — Section 10(10)

Gratuity received DURING service is fully taxable for everyone. Only death-cum-retirement gratuity qualifies for exemption, and the rules split three ways.

### 1. Government employees / Defence / Civil Services / local authority (under Pension Code or Regulations)

Fully exempt — Section 10(10)(i).

### 2. Employees covered by the Payment of Gratuity Act, 1972 — Section 10(10)(ii)

Least of the following is exempt:

₹20,00,000
Actual gratuity received
15/26 × Last drawn Salary × CYS (Completed Years of Service), where any part of a year in excess of 6 months counts as a full year

> Salary here = Basic + Any D.A. (full DA)

### 3. Employees NOT covered by the Payment of Gratuity Act — Section 10(10)(iii)

Least of the following is exempt:

₹20,00,000
Actual gratuity received
15/30 × Average Salary × CYS, where any fraction of a year is ignored

> Salary here = Basic + D.A. (forming part of retirement benefits) + Commission (% of turnover)

> Average salary = average of the 10 months immediately preceding the month of retirement.

### Compare the two formulas carefully

	Covered by Gratuity Act	Not covered
Fraction	15/26	15/30
Salary	Last drawn; Basic + full DA	Average of last 10 months; Basic + DA(retirement) + Commission
Part-year	> 6 months = full year	fraction ignored

### Overarching limits

The ₹20 lakh ceiling is a lifetime limit — applies even where gratuity is received from two or more employers.
Exemption u/s 10(10) is available irrespective of the tax regime.

Worked example

### Example 1

Covered by Gratuity Act. Last drawn Basic ₹60,000 + DA ₹20,000 = ₹80,000. Service = 30 years 7 months → 31 completed years (7 months > 6 months). Formula = 15/26 × 80,000 × 31 = ₹14,30,769. Exempt = least of ₹20,00,000 / actual gratuity / ₹14,30,769.

### Example 2

Not covered by Gratuity Act. Average salary (last 10 months) = Basic + retirement DA + commission = ₹70,000. Service = 30 years 7 months → 30 years (fraction ignored). Formula = 15/30 × 70,000 × 30 = ₹10,50,000. Exempt = least of ₹20,00,000 / actual gratuity / ₹10,50,000.

⚠️ Common exam mistakes

Using 15/26 for a non-covered employee or 15/30 for a covered one — covered = 15/26, not covered = 15/30.
Rounding part-years the same way in both cases — covered: >6 months = 1 year; not covered: fraction simply ignored.
Using last-drawn salary for a non-covered employee — they use the AVERAGE of the last 10 months.
Treating gratuity received during service as exempt — only death-cum-retirement gratuity is exempt; in-service gratuity is fully taxable.
Giving a fresh ₹20 lakh ceiling for each employer — it is a single lifetime limit.

Reference: Section 10(10)(i), 10(10)(ii), 10(10)(iii) — Income-tax Act, 1961

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Gratuity [Section 10(10)]

Worked example

⚠️ Common exam mistakes