When is TDS deducted on your gratuity payment?

Your employer deducts TDS on gratuity only if the amount payable to you exceeds your tax-exempt limit under Section 10(10) of the Income Tax Act, 2025. Below that limit, you receive the full amount with no TDS. Above it, your employer calculates the taxable excess and deducts TDS on that portion, using your applicable income tax slab, not a flat rate.

Gratuity is not automatically 100% tax-free for everyone. The exemption is capped for most private-sector employees, and government employees are the exception with no monetary cap.

What is your tax-exempt limit?

• Government employees: If you are a Central or State Government employee, or part of the defence forces, your gratuity is fully exempt under Section 10(10)(i), with no monetary ceiling on the exemption itself. Your employer will not deduct any TDS on gratuity, regardless of the amount.
• Private sector and PSU employees: The tax-exempt limit is ₹20 lakh, a lifetime limit across all employers you have worked for, not a per-employer allowance. If your calculated gratuity is at or below this, you receive it in full. If it exceeds ₹20 lakh, your employer must deduct TDS on the excess. For the full breakdown of how this limit and the "least of three" exemption formula work, see Gratuity Tax Exemption Limits for Private and Government Employees.

How much TDS is actually deducted?

Gratuity is treated as "Income from Salaries," so there is no fixed TDS rate like the flat rates applied to some other income types. If part of your gratuity is taxable, your employer adds that taxable portion to your total income for the year and deducts TDS under Section 192, based on your applicable income tax slab (broadly 5%, 20%, or 30%, depending on your total income).

Which slab applies also depends on whether you have declared the old or new tax regime to your employer for that financial year, since the two regimes tax the same income differently.

Does the Labour Codes wage definition affect your TDS?

Yes, indirectly. India's four Labour Codes took effect on 21 November 2025, and they introduced a revised definition of "wages" that affects how gratuity itself is calculated. Certain allowances excluded from "wages" cannot exceed 50% of your total remuneration, and if they do, the excess is added back and counted as wages for statutory purposes, including gratuity. For many salary structures where basic pay was historically a smaller share of CTC, this can meaningfully increase the calculated gratuity amount.

Because gratuity amounts are rising for many mid-level employees under this revised calculation, more people are crossing the ₹20 lakh exemption limit than before, simply because the underlying payout is larger. That is the real link between the Labour Codes and TDS: not a new tax rule, but a larger gratuity figure hitting the same existing ₹20 lakh cap.

Implementation timelines vary by state and are still being finalised in places, so this shouldn't be treated as fully settled everywhere yet.

Is there TDS on interest for a delayed gratuity payment?

Yes, but it is treated differently from the gratuity itself. If your employer delays payment beyond the statutory window and interest becomes payable, that interest is classified as "Income from Other Sources" rather than salary, and TDS on it is typically deducted under Section 194A where the threshold is crossed, separately from the salary-based TDS on the gratuity amount itself.

Can you avoid TDS with a declaration?

Not directly, since gratuity is salary income. Form 15G/15H, which some people use to avoid TDS on interest income, does not apply here. What can help is submitting Form 12BB to your employer with details of your eligible investments and deductions, since this can lower your effective tax slab and, in turn, the TDS deducted on your gratuity.

Also read

• Is Gratuity Taxable in India?
• Gratuity Tax Exemption Limits for Private and Government Employees
• How to Save Tax on Gratuity Amount Legally