To declare gratuity in your income tax return, enter the full gratuity amount as part of your gross salary and then claim the exempt portion separately under Section 10(10). The form is built to work in that order: the whole figure goes in, the exemption comes out, and only the balance flows into your taxable income. For most salaried filers the exempt amount is capped at ₹20 lakh across your lifetime, and the taxable remainder is charged at your slab rate.
Work Out the Exempt Amount First
You cannot fill the form correctly without the exemption figure, so calculate it before you log in.
Government employees, defence personnel, and employees of local authorities get the entire gratuity exempt under Section 10(10)(i), with no ceiling.1Indian Kanoon. Income Tax Act 1961 – Section 10(10) For everyone else, the exempt amount is the lowest of three numbers, and the formula depends on whether your employer is covered by the Payment of Gratuity Act, 1972.
If Your Employer Is Covered by the 1972 Act
The exempt amount is the lowest of:
- Last drawn salary (basic pay plus dearness allowance) × 15 ÷ 26 × completed years of service2Indian Kanoon. The Payment of Gratuity Act, 1972 – Payment of Gratuity
- ₹20 lakh
- Actual gratuity received
Service exceeding six months in the final year rounds up to a full year. Eight years and seven months counts as nine.2Indian Kanoon. The Payment of Gratuity Act, 1972 – Payment of Gratuity
If Your Employer Is Not Covered
The exempt amount is the lowest of:
- Half a month’s average salary × completed years of service, with the average taken over the ten months before you left1Indian Kanoon. Income Tax Act 1961 – Section 10(10)
- ₹20 lakh
- Actual gratuity received
Here, “salary” is basic pay, dearness allowance, and any commission based on a fixed percentage of turnover. Fractional years drop off. Eight years and eleven months counts as eight.
A Worked Example
Say you served a covered employer for 20 years, your last drawn basic plus DA was ₹80,000, and you received ₹12 lakh. The formula gives (80,000 × 15 ÷ 26) × 20, which is roughly ₹9,23,077. That is lower than both ₹20 lakh and the ₹12 lakh you actually received, so ₹9,23,077 is exempt and ₹2,76,923 is taxable.
Documents to Have Open Before You File
- Form 16 from your employer, which shows the gratuity paid, any TDS deducted, and the exemption already applied.
- The full and final settlement sheet from HR, listing the salary components used, the length of service, and the calculation itself. If it disagrees with Form 16, resolve the difference before filing.
- Your salary breakup, so you know the exact basic and dearness allowance figures. Bonuses, HRA, and other perks do not enter the gratuity formula.
- Your service record, including months, especially if you had internal transfers or a break in service.
If you have received gratuity from more than one employer over your working life, pull all the earlier records too. The ₹20 lakh cap is cumulative across employers and years, and any exemption you claimed previously reduces what is still available now.1Indian Kanoon. Income Tax Act 1961 – Section 10(10)
Where the Entries Go in ITR-1 or ITR-2
Most salaried filers use ITR-1 (Sahaj) if total income is under ₹50 lakh and the only heads involved are salary, one house property, and other sources like interest. Anything more complex goes into ITR-2. The gratuity entries work the same way in both.
Gross Salary
On the income tax e-filing portal, open the return for the correct assessment year and go to the salary section. Enter your total gross salary including the full gratuity amount. Do not omit gratuity from gross salary on the assumption that it is exempt. The form is designed to receive the whole figure and net out the exemption in the next field.3Income Tax Department. File ITR-1 (Sahaj) Online User Manual
Section 10(10) Exemption
Below the gross salary fields is a dropdown for “Allowances to the extent exempt under Section 10.” Pick Section 10(10) and enter the exempt amount you worked out. The portal reduces your taxable salary by that figure automatically.
Then open Schedule EI (Exempt Income) and report the same exempt amount there. This entry does not change your tax, but it puts the exemption on record so the department’s data matches your employer’s filings.
Review and Submit
Compare the auto-calculated tax against your Form 16. If TDS was already deducted on the taxable portion, the balance payable should drop accordingly. Submit and complete e-verification within 30 days.
Reconciling TDS With Form 16
Your employer must deduct TDS on any gratuity above the Section 10(10) exempt amount before releasing the payment. If the entire gratuity fits within the exemption, nothing is withheld. Either way, Form 16 should show what happened.
The problem case is under-deduction. If your employer miscalculated the exemption and withheld too little, the shortfall is yours to settle. You may need to pay advance tax or self-assessment tax before you file, and delaying can trigger interest under Sections 234B and 234C. Check the numbers when the gratuity is credited, not on the filing deadline.
Gratuity Paid to a Nominee
When gratuity is paid to a nominee or legal heir after an employee dies in service, the recipient reports it under “income from other sources” rather than salary. The ₹20 lakh exemption still applies, and any excess is taxed at the nominee’s slab rate in their own return.
Gratuity From More Than One Employer
The ₹20 lakh ceiling is a lifetime figure. If you claimed ₹8 lakh in exemption against an earlier employer’s gratuity, only ₹12 lakh of exemption is left for anything you receive later.1Indian Kanoon. Income Tax Act 1961 – Section 10(10) This is one of the errors the department flags most often during processing, so track earlier claims carefully.
The New Tax Regime Does Not Change This
From assessment year 2024-25, the new regime under Section 115BAC is the default. The Section 10(10) exemption on gratuity is available under both the old and new regimes and is claimed the same way. The regime choice affects other items like Section 80C, HRA, and LTA, but gratuity relief stays intact.
What Happens If You Get It Wrong
Section 270A separates two kinds of errors. Underreporting income carries a penalty of 50% of the tax on the unreported amount. Misreporting, which includes claiming an exemption you were not entitled to or suppressing facts, carries 200% of the tax on the misreported amount.4Income Tax Department. Income Tax Act 1961 – Section 270A
In gratuity cases, the usual trigger is over-claiming: wrong formula, inflated years of service, or ignoring an exemption already used against a previous employer. Whether the department treats the error as careless or deliberate decides which penalty applies. Keeping the settlement sheet, the salary breakup, and any earlier exemption records on file is the cleanest defence.