## Gratuity – Meaning
Gratuity is a lump-sum payment made by the employer to an employee in appreciation of past services, usually at the time of retirement, resignation, or death.
## Taxability Map
| Stage / Type of Employee | Treatment |
|---|---|
| Gratuity received during the course of employment | Fully Taxable |
| At retirement – Government Employee | Fully Exempt |
| At retirement – Employee covered under Payment of Gratuity Act, 1972 | Partially Exempt (formula below) |
| At retirement – Employee not covered under PGA | Partially Exempt (different formula) |
## A. Employee covered under Payment of Gratuity Act, 1972
Exemption = Lower of:
1. Actual Gratuity received
2. 15/26 × Salary p.m. × Number of completed years of service
3. ₹20,00,000
Notes:
- Salary = Last drawn Basic + DA (whether forming part of retirement benefits or not – both DAs)
- Fraction of a year > 6 months → rounded up; ≤ 6 months → ignored (e.g., 26 yrs 9 m = 27 yrs).
## B. Employee NOT covered under PGA
Exemption = Lower of:
1. Actual Gratuity received
2. 1/2 × Average Salary p.m. × Number of completed years of service
3. ₹20,00,000
Notes:
- Salary = Basic + DA(forming part) + CT.
- Average = average of the preceding 10 months ending on the date of retirement.
- Only completed years counted – any fraction is ignored (e.g., 26 yrs 9 m = 26 yrs).
## Important Cumulative Limit – ₹20,00,000
The ₹20,00,000 lifetime exemption is the aggregate across all employers. Any exemption claimed in earlier years from a previous employer reduces the limit available with the current employer.