My client retired last year and received gratuity from two employers in the same year. The Assessing Officer says he can only have one twenty-lakh exemption in total, and has also asked about gratuity he received when he changed jobs in 2014. Is that right, and where does the twenty-lakh figure come from?
The Assessing Officer is right on both points. Section 10(10) has three separate limbs and only the third carries a Central Government ceiling; that ceiling is twenty lakh rupees, specified by CBDT notification S.O. 1213(E) dated 8 March 2019 in relation to employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018, or whose employment is terminated on or after that date. The first proviso to the clause caps the aggregate exemption where gratuities are received from more than one employer in the same previous year, and the second proviso reduces the ceiling by whatever was left out of total income under the clause in any earlier previous year — so the twenty lakhs is a once-in-a-lifetime cumulative allowance, not a per-employer or per-year one.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2018-03-29, reported as Section 10(10) of the Income-tax Act, 1961, as amended up to 2025. It bears on section 10(10), section 10(10)(i), section 10(10)(ii), section 10(10)(iii), section 10(10AA), section 17(3) of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains Exemptions matters.
This is the single most-received retirement payment in Indian practice and the clause is more structured than it looks. Limb (i) covers death-cum-retirement gratuity under the Central Government's revised Pension Rules or the CCS (Pension) Rules 1972, similar schemes for the civil services of the Union or a State, holders of civil posts, all-India services, employees of a local authority, and retiring gratuity under the Pension Code applicable to the defence services: that limb is unqualified and carries no monetary ceiling at all. Limb (ii) covers gratuity received under the Payment of Gratuity Act 1972 and exempts it to the extent of the amount calculated under sub-sections (2) and (3) of section 4 of that Act — so the ceiling for a covered employee is imported from the labour statute, not from any income-tax notification, and it moved to twenty lakh rupees only on 29 March 2018 by S.O. 1420(E), the Payment of Gratuity (Amendment) Act 2018 having been brought into force that day by S.O. 1419(E). Limb (iii) is the residual limb — any other gratuity on retirement, incapacity, termination or death — and exempts one-half month's salary for each year of completed service computed on the average salary of the ten months immediately preceding the month of the event, subject to the Central Government's notified limit. It is only limb (iii) that S.O. 1213(E) speaks to. Two consequences follow that practitioners miss. First, a covered employee arguing under limb (ii) is arguing about section 4(3) of the Payment of Gratuity Act, and the income-tax notification does not help him. Second, both provisos to the clause are aggregation provisions and they operate across employers within a year and across years — so a client who took a tax-free gratuity on an earlier job change has already spent part of his allowance, and the return position has to be built from his whole career, not from this year's Form 16. The Explanation fixes "salary" for both this clause and s.10(10AA) as the meaning in clause (h) of rule 2 of Part A of the Fourth Schedule, which is the point the Madras High Court decided in K. Gopalakrishnan v Central Board of Direct Taxes, already in this library.
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Clause (10) of section 10 reads: (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence services ; (ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act ; (iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government. Two provisos follow, the first capping the aggregate exemption where gratuities are received from more than one employer in the same previous year and the second reducing the limit by amounts not included in total income under the clause in earlier previous years. An Explanation states that in this clause, and in clause (10AA), "salary" shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule. Notification S.O. 1213(E) dated 8 March 2019, issued by the Central Board of Direct Taxes under sub-clause (iii) of clause (10) of section 10 and in supersession of an earlier notification of 11 June 2010, specifies twenty lakh rupees as the limit for the purposes of that sub-clause in relation to the employees who retire or become incapacitated prior to such retirement or die on or after the 29th day of March, 2018 or whose employment is terminated on or after the said date.
The exemption for gratuity has three limbs. Limb (i) is unqualified for the government and public-service categories it lists. Limb (ii) exempts gratuity under the Payment of Gratuity Act 1972 only to the extent computed under sub-sections (2) and (3) of section 4 of that Act. Limb (iii) exempts any other gratuity up to one-half month's salary for each year of completed service on the ten-month average, subject to the Central Government's notified limit, which is twenty lakh rupees for employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018 or whose employment is terminated on or after that date. The notified limit is an aggregate: the first proviso caps it across employers within the same previous year and the second reduces it by amounts already left out of total income under the clause in earlier previous years.
Not applicable — this is a statement of statutory text and of a notification, both read in their own words. No judicial reasoning is involved. The relationship between limb (ii) and section 4(3) of the Payment of Gratuity Act, and the effect of the 29 March 2018 date, are as explained by the Madras High Court in G. Srinivasan v Union of India, which is entered separately in this library.
Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this clause shall not exceed the limit so specified :
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Handle my notice → Ask a CA on WhatsAppThe Assessing Officer is right on both points. Section 10(10) has three separate limbs and only the third carries a Central Government ceiling; that ceiling is twenty lakh rupees, specified by CBDT notification S.O. 1213(E) dated 8 March 2019 in relation to employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018, or whose employment is terminated on or after that date. The first proviso to the clause caps the aggregate exemption where gratuities are received from more than one employer in the same previous year, and the second proviso reduces the ceiling by whatever was left out of total income under the clause in any earlier previous year — so the twenty lakhs is a once-in-a-lifetime cumulative allowance, not a per-employer or per-year one. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(10), section 10(10)(i), section 10(10)(ii), section 10(10)(iii), section 10(10AA), section 17(3) of the Income Tax Act 1961. It is reported as Section 10(10) of the Income-tax Act, 1961, as amended up to 2025. This is the single most-received retirement payment in Indian practice and the clause is more structured than it looks. Limb (i) covers death-cum-retirement gratuity under the Central Government's revised Pension Rules or the CCS (Pension) Rules 1972, similar schemes for the civil services of the Union or a State, holders of civil posts, all-India services, employees of a local authority, and retiring gratuity under the Pension Code applicable to the defence services: that limb is unqualified and carries no monetary ceiling at all. Limb (ii) covers gratuity received under the Payment of Gratuity Act 1972 and exempts it to the extent of the amount calculated under sub-sections (2) and (3) of section 4 of that Act — so the ceiling for a covered employee is imported from the labour statute, not from any income-tax notification, and it moved to twenty lakh rupees only on 29 March 2018 by S.O. 1420(E), the Payment of Gratuity (Amendment) Act 2018 having been brought into force that day by S.O. 1419(E). Limb (iii) is the residual limb — any other gratuity on retirement, incapacity, termination or death — and exempts one-half month's salary for each year of completed service computed on the average salary of the ten months immediately preceding the month of the event, subject to the Central Government's notified limit. It is only limb (iii) that S.O. 1213(E) speaks to. Two consequences follow that practitioners miss. First, a covered employee arguing under limb (ii) is arguing about section 4(3) of the Payment of Gratuity Act, and the income-tax notification does not help him. Second, both provisos to the clause are aggregation provisions and they operate across employers within a year and across years — so a client who took a tax-free gratuity on an earlier job change has already spent part of his allowance, and the return position has to be built from his whole career, not from this year's Form 16. The Explanation fixes "salary" for both this clause and s.10(10AA) as the meaning in clause (h) of rule 2 of Part A of the Fourth Schedule, which is the point the Madras High Court decided in K. Gopalakrishnan v Central Board of Direct Taxes, already in this library. If it applies to you, the first step is this: Decide first which limb your client is in. Government service and the listed public services go to limb (i) and there is no monetary ceiling to argue about. An employee covered by the Payment of Gratuity Act goes to limb (ii). Everyone else goes to limb (iii).
Clause (10) of section 10 reads: (i) any death-cum-retirement gratuity received under the revised Pension Rules of the Central Government or, as the case may be, the Central Civil Services (Pension) Rules, 1972, or under any similar scheme applicable to the members of the civil services of the Union or holders of posts connected with defence or of civil posts under the Union (such members or holders being persons not governed by the said Rules) or to the members of the all-India services or to the members of the civil services of a State or holders of civil posts under a State or to the employees of a local authority or any payment of retiring gratuity received under the Pension Code or Regulations applicable to the members of the defence services ; (ii) any gratuity received under the Payment of Gratuity Act, 1972 (39 of 1972), to the extent it does not exceed an amount calculated in accordance with the provisions of sub-sections (2) and (3) of section 4 of that Act ; (iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which any such event occurs, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government. Two provisos follow, the first capping the aggregate exemption where gratuities are received from more than one employer in the same previous year and the second reducing the limit by amounts not included in total income under the clause in earlier previous years. An Explanation states that in this clause, and in clause (10AA), "salary" shall have the meaning assigned to it in clause (h) of rule 2 of Part A of the Fourth Schedule. Notification S.O. 1213(E) dated 8 March 2019, issued by the Central Board of Direct Taxes under sub-clause (iii) of clause (10) of section 10 and in supersession of an earlier notification of 11 June 2010, specifies twenty lakh rupees as the limit for the purposes of that sub-clause in relation to the employees who retire or become incapacitated prior to such retirement or die on or after the 29th day of March, 2018 or whose employment is terminated on or after the said date. The matter was decided on 2018-03-29 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. The exemption for gratuity has three limbs. Limb (i) is unqualified for the government and public-service categories it lists. Limb (ii) exempts gratuity under the Payment of Gratuity Act 1972 only to the extent computed under sub-sections (2) and (3) of section 4 of that Act. Limb (iii) exempts any other gratuity up to one-half month's salary for each year of completed service on the ten-month average, subject to the Central Government's notified limit, which is twenty lakh rupees for employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018 or whose employment is terminated on or after that date. The notified limit is an aggregate: the first proviso caps it across employers within the same previous year and the second reduces it by amounts already left out of total income under the clause in earlier previous years.
Not applicable — this is a statement of statutory text and of a notification, both read in their own words. No judicial reasoning is involved. The relationship between limb (ii) and section 4(3) of the Payment of Gratuity Act, and the effect of the 29 March 2018 date, are as explained by the Madras High Court in G. Srinivasan v Union of India, which is entered separately in this library. In the words reproduced by the source cited on this page: "Provided that where any gratuities referred to in this clause are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this clause shall not exceed the limit so specified :"
It was decided by the CBDT Circulars & Instructions on 2018-03-29 and is reported as Section 10(10) of the Income-tax Act, 1961, as amended up to 2025. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(10), section 10(10)(i), section 10(10)(ii), section 10(10)(iii), section 10(10AA), section 17(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. The exemption for gratuity has three limbs. Limb (i) is unqualified for the government and public-service categories it lists. Limb (ii) exempts gratuity under the Payment of Gratuity Act 1972 only to the extent computed under sub-sections (2) and (3) of section 4 of that Act. Limb (iii) exempts any other gratuity up to one-half month's salary for each year of completed service on the ten-month average, subject to the Central Government's notified limit, which is twenty lakh rupees for employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018 or whose employment is terminated on or after that date. The notified limit is an aggregate: the first proviso caps it across employers within the same previous year and the second reduces it by amounts already left out of total income under the clause in earlier previous years. It arises in Salary & Perquisites and Capital Gains Exemptions matters, on section 10(10), section 10(10)(i), section 10(10)(ii), section 10(10)(iii), section 10(10AA), section 17(3) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the client is in limb (ii), take the computation from sub-sections (2) and (3) of section 4 of the Payment of Gratuity Act, and check the date the ceiling in section 4(3) changed against the client's date of retirement — the twenty-lakh figure there took effect on 29 March 2018 and not before. If the client is in limb (iii), compute one-half month's salary for each year of completed service on the average salary of the ten months immediately preceding the month of retirement, incapacity, termination or death, then cap it at twenty lakh rupees. Before signing off the return, reconstruct every earlier gratuity the client has received and how much of it was left out of total income under s.10(10). The second proviso reduces the ceiling by that amount. Ask for the earlier years' returns, not just this year's Form 16. Where gratuities came from more than one employer in the same previous year, apply the first proviso and take one aggregate ceiling across them. Take the "salary" figure from clause (h) of rule 2 of Part A of the Fourth Schedule and not from the Form 16 gross. Do not include allowances the Fourth Schedule definition excludes. If the client retired before 29 March 2018 and is being pressed to claim twenty lakhs, read G. Srinivasan v Union of India (Madras High Court) first — that argument has been run and lost.
Still good law. Three separate texts of section 10 print clause (10) in identical words, and the Department's current explanatory material, which states on its face that it is amended up to the Finance Act 2026, still prints Rs. 20,00,000 as the limb (iii) figure. That is the best evidence obtainable here that both the clause and the figure are unchanged for tax years up to AY 2026-27. It is not the same as reading a Finance Act. No Finance Act text has been read, and no amendment footnote against clause (10) could be read, so the clause's own legislative history is not established here and no insertion date is stated for any limb. Note the gap between the date the ceiling operates from and the date of the instrument that fixed it: S.O. 1213(E) is dated 8 March 2019 and specifies twenty lakh rupees to apply from 29 March 2018. A gratuity received between those two dates is governed by the notification even though it had not been issued when the money was paid, and that is the source of most of the confusion about which ceiling applies. No check of judicial treatment of s.10(10) has been carried out beyond reading G. Srinivasan v Union of India, which is entered separately in this library and which explains the relationship between limb (ii) and section 4(3) of the Payment of Gratuity Act and the effect of the 29 March 2018 date. What would displace the entry: a further notification under sub-clause (iii) raising the ceiling, or an amendment to the clause itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
SOURCING. Clause (10) has been read in full in three separate texts of section 10, all headed 'Incomes not included in total income' in the Income-tax Act, 1961, and all printing the clause identically — which is the best evidence available here that it has not moved. The Department's own current explanatory material on the taxability of retirement benefits, which states on its face that it contains the provisions of the Income-tax Act, 1961 as amended by the Finance Act, 2026, still prints Rs. 20,00,000 as the limb (iii) figure. That is the only evidence obtained that the figure is still current for tax years up to AY 2026-27. THE NOTIFICATION has been read on two independent routes. The first is the Gazette text itself, which prints 'MINISTRY OF FINANCE / (Department of Revenue) / (CENTRAL BOARD OF DIRECT TAXES) / NOTIFICATION / New Delhi, the 8th March, 2019 / (Income-tax) / S.O. 1213(E)', the enabling words 'In exercise of the powers conferred by sub-clause (iii) of clause (10) of section 10 of the Income-tax Act, 1961', the figure 'twenty lakh rupees' and the commencement words. The second is paragraph 13 of the Madras High Court's judgment in G. Srinivasan v Union of India, which reproduces S.O. 1213(E), S.O. 1419(E) and S.O. 1420(E) in full. ONE DIVERGENCE BETWEEN THE TWO ROUTES, recorded rather than resolved: the High Court's reproduction describes the enabling provision as 'sub-section (iii) of clause (10) of section 10', whereas the Gazette text gives 'sub-clause (iii)', which is what the Act's own wording requires. The Gazette text also prints the Board's file line, '[Notification No. 16 /2019/F. No. 200/8/2018-ITA-I]', above the signature 'Sd/- RAJARAJESWARI R., Under Secy.', and that is the source of the notification number given here. No copy of the notification issued by the Board itself has been obtained. WHAT WAS NOT DONE. The text of section 4(2) or 4(3) of the Payment of Gratuity Act 1972, and of clause (h) of rule 2 of Part A of the Fourth Schedule, has NOT been read. What is said about them is taken from the Income-tax Act's own words and from paragraph 13 of G. Srinivasan, and a reader who needs the labour-law computation should go to that Act. 'decided_on' is the COMMENCEMENT DATE of the ceiling this entry states — 29 March 2018, the date from which S.O. 1213(E) specifies twenty lakh rupees to apply — and is not a decision date; the notification itself is dated 8 March 2019. 'bench' and 'favours' are inapplicable to a statutory entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The exemption for gratuity has three limbs. Limb (i) is unqualified for the government and public-service categories it lists. Limb (ii) exempts gratuity under the Payment of Gratuity Act 1972 only to the extent computed under sub-sections (2) and (3) of section 4 of that Act. Limb (iii) exempts any other gratuity up to one-half month's salary for each year of completed service on the ten-month average, subject to the Central Government's notified limit, which is twenty lakh rupees for employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018 or whose employment is terminated on or after that date. The notified limit is an aggregate: the first proviso caps it across employers within the same previous year and the second reduces it by amounts already left out of total income under the clause in earlier previous years.
TaxSphere, “Statutory position — s.10(10): the three limbs of the gratuity exemption, the twenty-lakh ceiling set by S.O. 1213(E), and why the ceiling is an aggregate across employers and across years”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-section-10-10-gratuity-three-limbs-and-the-twenty-lakh-ceiling/ (validity last checked 2026-09-09)
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My client retired from a public sector undertaking a few weeks before 29 March 2018 and was paid twenty lakhs of gratuity, but tax was deducted on ten lakhs of it. Central Government employees had already been given the twenty-lakh ceiling from 1 January 2016. Can I get the higher exemption on Article 14 grounds?
For the s.10(10) gratuity and s.10(10AA) leave encashment limits, can I compute 'salary' on the pay my employer actually used — basic plus all the allowances that went into provident fund pay?
My client is a private-sector retiree who was paid leave encashment. The Assessing Officer has restricted the exemption to three lakhs. What is the current limit, what instrument set it, and how is the exempt amount actually computed?
My client received a payment from a former employer that is not gratuity, not retrenchment compensation and not under any VRS. The Assessing Officer says it is profits in lieu of salary. What exactly does s.17(3) cover, and what does it not?
