Ans: Section 10(10) divides employees into three categories for the purpose of taxation of gratuity: Employees of Central and State Governments, local authorities and the Defence sector have a full exemption. For employees paid gratuity under the Payment of Gratuity Act, tax is exempted up to Rs. 20 lakh. For any employee, tax exemption is limited to half a month's salary for every year of service or Rs. 10 lakh.