Retirement Just Got Tax-Friendly CBDT Hikes Gratuity Exemption Limit
Gratuity exemption ₹5 lakh is now officially allowed even under the new tax regime from FY 2024–25 onwards. This change, clarified by CBDT in a recent circular, gives a major boost to retirees who opt for the simplified tax regime under Section 115BAC(1A).
Let’s decode this major update in simple terms and understand what it means for your retirement planning.
What Changed in Gratuity Tax Rules?
Earlier, the ₹20 lakh gratuity exemption under Section 10(10)(iii) was not available under the new tax regime (introduced in Budget 2020). Retirees had to give up this tax benefit if they chose the concessional slab rates.
Now, with CBDT Circular No. 06/2025 dated 27.05.2025, this has changed.
✅ Gratuity up to ₹5,00,000 will now be exempt even under the new regime (115BAC(1A)).
Who Can Claim This ₹5 Lakh Exemption?
- Individuals opting for new tax regime (default regime) u/s 115BAC(1A)
- Retirement, resignation, or death-related gratuity received
- Gratuity paid by employer under the Payment of Gratuity Act, 1972 or otherwise
Note: The full ₹20 lakh exemption remains available only in old regime or u/s 115BAC(6) (opt-in new regime for business/professional income).
Comparison: Old vs New Tax Regime on Gratuity (FY 2024–25)
| Feature | Old Regime | New Regime (115BAC(1A)) |
|---|---|---|
| Gratuity Exemption Limit | ₹20,00,000 | ₹5,00,000 |
| Full Deductions Allowed? | Yes | No |
| Lower Tax Slabs? | No | Yes (concessional) |
| Need to Opt-In? | Yes | No (default for individuals) |
CBDT Clarification: Legal Basis
As per CBDT Circular No. 06/2025, following tax exemptions are now allowed under new regime:
- Leave encashment up to ₹3 lakh
- Gratuity up to ₹5 lakh
- Voluntary Retirement Scheme (VRS) amount up to ₹5 lakh
This move ensures parity between the old and new regimes, helping salaried and retired individuals plan better without forced tax trade-offs.
Expert View: What Should Retirees Do?
💡 “If your retirement corpus includes gratuity, VRS, and leave encashment, shifting to the new tax regime no longer means total tax loss. But calculate carefully—if gratuity exceeds ₹5 lakh, the old regime may still save more.” – CA Neha Rathi, Tax Consultant
Summary
CBDT allows gratuity exemption up to ₹5 lakh under new tax regime (Sec 115BAC(1A)) from FY 2024–25. Earlier only available under old regime, this move benefits salaried retirees choosing lower tax slabs.
FAQs
Q1. Is full ₹20 lakh gratuity still exempt in the new tax regime?
No. Under the new default tax regime (115BAC(1A)), only ₹5 lakh is exempt.
Q2. Can I still claim full ₹20 lakh exemption?
Yes, but only if you opt for the old regime or the opt-in new regime under 115BAC(6) (for business/professional income cases).
Q3. Does this apply to government and private employees?
Yes. Both categories are eligible, subject to respective gratuity laws and limits.
Final Thoughts
This ₹5 lakh gratuity exemption under the new tax regime is a welcome step for India’s aging workforce. If you’re nearing retirement or guiding someone who is, plan ahead. Choose your tax regime based on overall income, not just one exemption.