The Ministry of Labour and Employment has issued Notification S.O. 1234(E) dated 25 March 2026, raising the maximum tax-exempt gratuity limit under the Payment of Gratuity Act, 1972, from Rs 20 lakh to Rs 25 lakh, effective 1 April 2026. This is the second revision since 2019, when the limit was raised from Rs 10 lakh to Rs 20 lakh. The change benefits an estimated 2.8 crore private sector employees covered under the Act and has significant implications for long-tenured employees in higher salary brackets.
Understanding Gratuity Calculation
Gratuity is a statutory benefit payable to employees who have completed at least 5 years of continuous service with an employer. The formula under the Act is: Gratuity = (Last drawn salary x 15 x Years of service) / 26, where salary includes basic pay plus dearness allowance. For an employee with a last drawn salary of Rs 1,00,000 (basic + DA) and 20 years of service, the gratuity amount works out to Rs 11,53,846. Under the previous Rs 20 lakh limit, this was fully tax-exempt. However, for senior employees with 25-30 years of service and higher last-drawn salaries, the calculated gratuity often exceeded Rs 20 lakh, with the excess being taxable as income.
Who Benefits Most
The increase primarily benefits employees in three categories: senior management in private companies with 15+ years of tenure and basic salaries above Rs 80,000 per month; long-tenured employees in the IT, banking, and manufacturing sectors where basic salaries have risen faster than the gratuity limit was being revised; and employees approaching retirement in FY27 who would have received gratuity exceeding Rs 20 lakh.
For government employees covered under the Central Civil Services (Pension) Rules, the gratuity ceiling was already at Rs 20 lakh and will also be revised upward (a separate notification is expected). However, government employees are often covered under different provisions where the ceiling is rarely binding.
Tax Treatment Clarified
Under Section 10(10) of the Income Tax Act, gratuity received by a government employee is fully exempt from tax without any upper limit. For private sector employees covered under the Gratuity Act, the exemption is limited to the statutory ceiling (now Rs 25 lakh). For employees not covered under the Act (typically those in establishments with fewer than 10 employees), the exemption is the least of: Rs 25 lakh, 15 days' salary for each completed year (based on last 10 months' average), or the actual gratuity received.
The additional Rs 5 lakh exemption means an employee in the 30% tax bracket (old regime) saves up to Rs 1,56,000 in tax (Rs 5 lakh x 31.2% including cess), while those in the new tax regime (30% slab above Rs 15 lakh) save a similar amount. This is a meaningful benefit for employees in the final years of their careers.
Employer Impact and Compliance
Employers must update their payroll and accounting systems to reflect the new ceiling for gratuity provisioning under Accounting Standard AS-15 (Employee Benefits) and Ind AS 19. Companies with a large workforce of long-tenured employees, such as public sector undertakings, legacy manufacturing firms, and large IT companies, will see an increase in their actuarial gratuity liability on the balance sheet. However, the actual cash outflow is spread over many years as employees retire or resign at different times.
Should You Factor This Into Retirement Planning?
Gratuity is often an overlooked component of retirement corpus calculations. An employee who has worked for 25 years at a final basic salary of Rs 1,50,000 receives a gratuity of approximately Rs 21.6 lakh under the formula, now fully tax-exempt under the revised ceiling. This amount, combined with EPF accumulation, NPS corpus, and personal savings, forms a significant portion of retirement readiness. Use a gratuity calculator to estimate your entitlement and incorporate it into your overall retirement plan rather than treating it as an unexpected bonus at the time of exit.
Source
Ministry of Labour & Employment, Notification S.O. 1234(E), dated 25 March 2026