Gratuity Rules 2026-27: Calculation, Tax & Compliance

Gratuity is one of the most significant retirement benefits for Indian employees, serving as a lump-sum payment acknowledging years of dedicated service. Whether you're planning your retirement in FY 2026-27, switching jobs after completing five years, or an HR professional ensuring compliance, understanding the latest gratuity rules is essential. This comprehensive guide covers calculation formulas, tax treatment under Section 10(10), employer obligations, and recent regulatory updates to help you navigate gratuity provisions confidently.

What is Gratuity and Who is Eligible in 2026-27?

Gratuity is a statutory benefit paid by employers to employees as a token of appreciation for services rendered. Governed primarily by the Payment of Gratuity Act, 1972, this benefit has evolved significantly over the decades. The Act applies to factories, mines, oilfields, plantations, ports, railway companies, shops, and establishments employing 10 or more persons on any day during the preceding 12 months.

To qualify for gratuity payment in FY 2026-27, an employee must have completed a minimum of 5 years of continuous service with the same employer. However, this requirement is waived in cases of death or disablement due to accident or disease. The Act covers all employees, including piece-rated workers, seasonal workers, and apprentices, provided they meet the service criteria.

For employees not covered under the Payment of Gratuity Act—such as those in establishments with fewer than 10 employees—gratuity may still be payable if provided under employment contracts or company policy. The tax treatment under Section 10(10) of the Income Tax Act, 1961, applies to all gratuity payments regardless of Act coverage.

Gratuity Calculation Formula for FY 2026-27

The calculation methodology differs based on whether employees are covered under the Payment of Gratuity Act and their employment sector. Understanding these formulas is crucial for accurate financial planning.

For Employees Covered Under the Payment of Gratuity Act

For private sector employees and those in establishments covered under the Act, the formula is:

Gratuity = (Last Drawn Salary × 15 × Number of Completed Years of Service) ÷ 26

Here, 'Last Drawn Salary' comprises Basic Salary + Dearness Allowance (DA). The factor '15' represents 15 days' wages for each completed year of service, and '26' represents the average number of working days in a month (excluding Sundays).

Example: Rajesh retires from a private company in March 2027 after 22 years of service. His last drawn basic salary is ₹55,000 and DA is ₹15,000. His gratuity calculation would be: (₹70,000 × 15 × 22) ÷ 26 = ₹8,65,385. The maximum gratuity payable under the Act is ₹20,00,000.

For Government Employees

Central and state government employees follow a different formula specified under the Central Civil Services (Pension) Rules:

Gratuity = Last Drawn Salary × 1/4 × Number of Completed Years of Service

For government employees, there is no maximum ceiling on the gratuity amount payable, and the entire amount is exempt from tax under Section 10(10)(i) of the Income Tax Act.

Example: Meena, a government employee, retires with a last drawn basic pay of ₹1,20,000 (including DA) after 30 years of service. Her gratuity = ₹1,20,000 × 1/4 × 30 = ₹9,00,000, fully tax-exempt.

For Employees Not Covered Under the Act

For employees in establishments not covered under the Payment of Gratuity Act but receiving gratuity as per employment terms:

Gratuity = (Last Drawn Salary × Number of Completed Years of Service × 50%) ÷ 2

This calculation method typically applies to organizations with fewer than 10 employees or where gratuity is an ex-gratia payment.

Tax Treatment of Gratuity Under Section 10(10) for FY 2026-27

Section 10(10) of the Income Tax Act provides for partial or full exemption on gratuity received, depending on the employment category. Understanding these exemption limits is essential to calculate your taxable income accurately and use tools like the Income Tax Calculator for precise tax planning.

Exemption for Government Employees

Under Section 10(10)(i), gratuity received by central government, state government, local authority, and defence services employees is fully exempt from income tax without any monetary ceiling.

Exemption for Employees Covered Under the Act

For employees covered under the Payment of Gratuity Act, 1972, Section 10(10)(ii) provides exemption for the least of the following three amounts:

• Actual gratuity received
• ₹20,00,000 (maximum exemption limit as of FY 2026-27)
• Calculated gratuity: (Last drawn salary × 15 × Years of service) ÷ 26

Any amount exceeding the exemption is added to total income and taxed as 'Income from Salary' at applicable slab rates.

Example: Priya receives ₹25,00,000 as gratuity upon retirement. Her calculated gratuity is ₹18,50,000. The exemption will be the least of ₹25,00,000 (actual), ₹20,00,000 (maximum limit), or ₹18,50,000 (calculated) = ₹18,50,000. Therefore, ₹6,50,000 (₹25,00,000 - ₹18,50,000) will be taxable.

Exemption for Other Employees

For employees not covered under the Act, Section 10(10)(iii) provides exemption for the least of:

• Actual gratuity received
• ₹20,00,000
• (Last drawn salary × Years of service × 50%) ÷ 2

Employee Category	Applicable Section	Maximum Exemption Limit	Calculation Basis
Government Employees	Section 10(10)(i)	Fully Exempt (No Limit)	Actual amount received
Covered Under Act	Section 10(10)(ii)	₹20,00,000	(Salary × 15 × Years) ÷ 26
Not Covered Under Act	Section 10(10)(iii)	₹20,00,000	(Salary × Years × 50%) ÷ 2

Employer Compliance Requirements Under Payment of Gratuity Act

Employers must adhere to strict compliance requirements under the Payment of Gratuity Act, 1972, to avoid penalties and legal complications. Here are the key obligations for FY 2026-27:

Registration and Nomination

Every establishment covered under the Act must be registered with the appropriate controlling authority within the prescribed timeframe. Employers should ensure all eligible employees submit Form F (nomination for gratuity) at the time of joining. If an employee has a family, the nomination becomes invalid, and gratuity becomes payable to family members as per the succession rules defined in the Act.

Payment Timeline

Gratuity must be paid within 30 days from the date it becomes payable. If the employer delays payment beyond this period without sufficient reason, the amount becomes payable with interest. The controlling authority can direct payment of simple interest at the rate of 10% per annum from the due date until actual payment.

Calculation and Maximum Limits

Employers must correctly calculate gratuity using the statutory formula and ensure payments do not exceed ₹20,00,000 per employee under the Act. This ceiling applies to the gratuity payment obligation under the Act, though employers can pay higher amounts as ex-gratia, which will have different tax implications.

Deductions and Forfeiture

Gratuity can be wholly or partially forfeited only in cases where an employee's services are terminated for willful omission or negligence causing damage or loss to the employer's property, or for riotous or disorderly conduct or any act of violence. Mere termination due to performance issues does not justify forfeiture.

Record Maintenance

Employers must maintain proper records including a register of employees (Form A), nomination forms (Form F), and payment details (Form I). These records must be preserved and made available for inspection by controlling authorities.

Penalties for Non-Compliance

Non-compliance with the Act attracts penalties. Failure to pay gratuity within the stipulated time can result in imprisonment up to 2 years and/or a fine up to ₹20,000. Obstructing inspectors or failing to maintain proper records also invites penalties under Section 9 of the Act.

Death Gratuity and Special Provisions for FY 2026-27

In unfortunate circumstances involving an employee's death during service, gratuity becomes immediately payable regardless of the length of service. The 5-year minimum service requirement is waived under Section 4(2) of the Payment of Gratuity Act.

Death gratuity is payable to the nominee specified by the employee in Form F. If no nomination exists, it is paid to legal heirs in the following order of succession: widow/widower, children, parents, and then other legal heirs as per the Act's succession provisions.

Example: Amit, who worked for 3 years in a manufacturing company, passes away unexpectedly. Despite not completing 5 years of service, his nominee (spouse) is entitled to receive gratuity calculated as: (₹45,000 × 15 × 3) ÷ 26 = ₹77,885 (approximately). This amount is fully exempt from tax in the hands of the recipient under Section 10(10).

Similarly, if an employee becomes disabled due to an accident or disease, gratuity becomes payable immediately without the 5-year service condition. This provision ensures financial support during critical times.

Recent Updates and Key Considerations for 2026-27

As of June 2026, several important considerations affect gratuity payments and compliance:

Exemption Limit Unchanged

The maximum gratuity exemption under Section 10(10) remains at ₹20,00,000, unchanged since the 2019 amendment. While there have been discussions about further increasing this limit considering inflation and salary growth, no official notification has been issued for FY 2026-27. Taxpayers should monitor CBDT circulars and Finance Act amendments for potential changes.

TDS on Gratuity Payments

Employers must deduct TDS on the taxable portion of gratuity payments under Section 192 of the Income Tax Act. The taxable amount (gratuity received minus exempt portion) is added to salary income, and TDS is deducted based on the employee's applicable tax slab. Employees can verify TDS deductions using the Form 26AS / TDS Fetch Tool to ensure accurate credit during ITR filing.

Treatment in New Tax Regime

The gratuity exemption under Section 10(10) is available under both the old and new tax regimes for FY 2026-27. Since this is a Section 10 exemption (not a Chapter VI-A deduction), it remains applicable regardless of the tax regime chosen by the employee. This makes gratuity planning advantageous under both regimes.

State-Specific Variations

While the Payment of Gratuity Act is a central legislation, some states have enacted their own rules for employees not covered under the central Act. Employers operating across multiple states should ensure compliance with both central and state-specific provisions where applicable.

Documentation for Tax Filing

When filing your Income Tax Return for FY 2026-27 (AY 2027-28), gratuity received should be reported in the salary schedule. Form 16 issued by employers will show the breakup of exempt and taxable gratuity. Maintain supporting documents including gratuity calculation sheets, Form 16, and appointment letters for potential scrutiny.

Frequently Asked Questions (FAQs)

What is the maximum gratuity exemption limit for FY 2026-27?

For FY 2026-27, the maximum gratuity exemption under Section 10(10) of the Income Tax Act is ₹20,00,000. This limit was increased from ₹10 lakhs to ₹20 lakhs in 2019 and continues to apply. Any gratuity amount received beyond ₹20 lakhs is taxable as salary income. This exemption applies to employees covered under the Payment of Gratuity Act, 1972, as well as government employees and those not covered under the Act.

How is gratuity calculated for private sector employees in 2026-27?

For private sector employees covered under the Payment of Gratuity Act, the formula is: Gratuity = (Last drawn salary × 15 × Number of completed years of service) ÷ 26. Last drawn salary includes basic salary plus dearness allowance. The factor 15 represents 15 days' wages for each completed year, and 26 represents the number of working days in a month. For example, if your last drawn salary is ₹60,000 and you worked for 20 years, gratuity = (60,000 × 15 × 20) ÷ 26 = ₹6,92,308.

Is gratuity received on resignation taxable?

Gratuity received on resignation is partially taxable depending on your employment category. For employees covered under the Payment of Gratuity Act, the exemption is the least of: actual gratuity received, ₹20 lakhs, or calculated gratuity [(Last drawn salary × 15 × years of service) ÷ 26]. Any amount exceeding the exemption limit is taxable as salary income. For employees not covered under the Act, the exemption is the least of: actual gratuity, ₹20 lakhs, or (Last drawn salary × years of service × 50%) ÷ 2.

When does an employee become eligible for gratuity payment?

Under the Payment of Gratuity Act, 1972, an employee becomes eligible for gratuity after completing a minimum of 5 years of continuous service with the employer. This applies to establishments employing 10 or more persons. However, in case of death or disablement, the 5-year service requirement is waived, and gratuity becomes payable immediately. Employers must pay gratuity within 30 days from the date it becomes payable. Failure to pay attracts penalties and interest under the Act.

What is the gratuity calculation formula for government employees?

For central and state government employees, the gratuity calculation formula is: Gratuity = (Last drawn salary × 1/4 × Number of completed years of service). Last drawn salary includes basic pay plus dearness allowance at the time of retirement. There is no maximum limit on gratuity amount for government employees, unlike private sector employees who are subject to the ₹20 lakh cap under the Payment of Gratuity Act. The entire gratuity amount received by government employees is exempt from tax under Section 10(10)(i).

Conclusion

Understanding gratuity rules for FY 2026-27 is crucial for both employees planning their retirement finances and employers ensuring statutory compliance. With the ₹20 lakh exemption limit, correct calculation formulas, and timely payment obligations, gratuity remains a valuable component of employee compensation. Whether you're calculating your retirement corpus or managing payroll compliance, staying updated with Payment of Gratuity Act provisions and Income Tax Act exemptions ensures smooth financial transitions. For accurate tax planning and compliance support, explore TaxFetch Tools designed specifically for Indian taxpayers and employers.