Gratuity's ₹20 lakh cap, explained
Why the same figure caps both the payout and the tax exemption — for different reasons.
₹20 lakh shows up twice in gratuity rules — once as a cap on what can legally be paid out, and once as a cap on how much of it is tax-free. They look like the same rule stated twice, but they apply under different sections, to different people, and in most real cases only one of them ever actually does anything.
One figure, two different sections
Section 4(3) of the Payment of Gratuity Act caps the actual payout at ₹20 lakh, but only for employees covered under the Act. Section 10(10)(iii) separately caps how much of any gratuity received — covered or not — is exempt from income tax, at the same ₹20 lakh figure. For an Act-covered employee, those two caps land on exactly the same amount, which makes the tax cap redundant: since the payout itself can never exceed ₹20 lakh, there’s never anything above that figure left to tax.
The formula computes to ₹25,96,154, but the actual payout is capped at ₹20,00,000— and all ₹20,00,000 of it is tax-free. The formula’s extra ₹5,96,154 simply isn’t paid at all, so there’s nothing left for the tax cap to catch.
This holds for government employees too, despite their tax exemption technically being unlimited under the same section — most government establishments are themselves covered under the Act, so the ₹20 lakh payout cap still applies first, and the unlimited exemption never gets a chance to matter.
Estimate the gratuity payable to you based on tenure and last drawn pay.
Where the ₹20L cap actually limits what you owe tax on
Employees at establishments not covered under the Act are a different story: there’s no statutory ceiling on what they can be paid, only a different (less generous) formula. Run the exact same salary and tenure through that formula instead:
The formula computes to ₹22,50,000— and since there’s no payout cap for a non-covered employee, all of it is actually paid. But the tax exemption is still capped at ₹20,00,000, so ₹2,50,000 of it becomes taxable income.
Same salary, same tenure, similar formula — but the non-covered employee both receives more money and owes tax on part of it, while the covered employee receives less but keeps every rupee tax-free. The ₹20 lakh figure is doing real work here, just not the same work it did in the first example.
How rarely this actually comes into play
For most people, neither cap ever binds. The formula for a covered employee is last-drawn monthly salary × 15 × years of service ÷ 26 — crossing ₹20 lakh needs salary times years to exceed roughly ₹34.67 lakh, which realistically means either a very long career or a very senior, high-paying one.
Formula amount: just ₹2,01,923— a tenth of the ceiling, with nothing capped and nothing taxable. For the large majority of gratuity payouts, this entire cap discussion is academic.
All figures are indicative and for educational purposes only — not financial advice.
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