Gratuity tax: New regime vs. old regime

Your gratuity exemption does not disappear if you choose the new tax regime. Section 10(10), which governs gratuity exemptions, is available under both the old and new regimes, unlike deductions such as 80C or HRA, which the new regime removes. Whichever regime you choose, up to ₹20 lakh of your gratuity (unlimited for government employees) stays exempt. Only your choice of regime changes how the taxable excess above that, if any, is taxed.

What is the basic difference between the two regimes for FY 2025-26?

Old regime: Higher headline tax rates, but you can claim deductions like Section 80C, Section 80D (Health Insurance), and HRA.

New regime (the default): Lower rates across wider slabs, with most deductions removed, but a standard deduction of ₹75,000 for salaried individuals and pensioners, and a Section 87A rebate that makes income up to ₹12 lakh effectively tax-free (up to ₹12.75 lakh for salaried individuals, once the standard deduction is included).

The key exception: Section 10(10) gratuity exemption applies in both regimes. Choosing the new regime doesn't cost you this particular benefit.

How is gratuity treated under the new tax regime?

Since the new regime removes most other deductions, your gratuity exemption becomes proportionally more valuable, it is one of the few ways to receive a large sum with no tax on the exempt portion:

• Exemption limit: Up to ₹20 lakh for private-sector employees. Unlimited for government employees.
• How it works: The exempt portion, calculated using the "least of three" rule, is subtracted from your gross salary before the new regime's slabs apply to the remainder.
• Standard deduction: The new regime's ₹75,000 standard deduction applies on top of, and separately from, your gratuity exemption.

How is gratuity treated under the old tax regime?

If you are stuck with the old regime to make the most of deductions like Home Loan interest (Section 24b) or Section 80C investments, your gratuity exemption works the same way as described above, the same ₹20 lakh limit and "least of three" calculation apply, layered on top of your other old-regime deductions.

One thing to be aware of regardless of regime: the four Labour Codes, effective November 2025, changed how "wages" are defined for gratuity calculation purposes. Certain excluded allowances cannot exceed 50% of your total remuneration. If they do, the excess is added back and counted as wages.

For many salary structures, this can mean a larger calculated gratuity than before, which is a wage-calculation change, not a change to the tax rules themselves. Implementation is still being finalised in some states, so treat this as evolving rather than fully settled.

Side-by-side comparison

How do you report gratuity in your ITR under either regime?

The process is the same regardless of which regime you choose. Report the total gratuity received under "Income from Salary," claim the exempt portion under the Section 10(10) field, and if the taxable excess pushes you into a higher bracket, you may be able to claim relief under Section 89(1) by filing Form 10E. See How to Show Gratuity in Your ITR for the full step-by-step process.

Does your choice of regime matter more in the year you receive a large gratuity?

It can, since a large taxable excess is exactly the kind of income where the two regimes' slab structures diverge most. As an illustration only: if your taxable excess (the amount above ₹20 lakh) is ₹15 lakh, the two regimes tax that portion differently, the new regime's slabs are generally gentler in the ₹8-16 lakh range, while the old regime moves to a flat 30% sooner.

Whether that makes the new regime the better choice for you depends on your full financial picture, including any deductions you would otherwise claim under the old regime. This is illustrative only, not a recommendation, run the actual numbers for your situation or speak with a tax advisor before deciding.

Salaried individuals without business income can choose their regime freely each year at the time of filing, so this decision isn't locked in permanently.

Also read

• Is Gratuity Taxable in India?
• Gratuity Tax Exemption Limits for Private and Government Employees
• When Is TDS Deducted on Your Gratuity Payment?
• How to Show Gratuity in Your ITR