The short answer
| Gratuity | Leave encashment at exit | |
|---|---|---|
| Tax-free up to | ₹20 lakh, for your whole working life | ₹25 lakh, for your whole working life |
| Who qualifies | 5 years with the same employer (1 year for fixed-term staff) | Anyone who resigns or retires |
| New regime too? | Yes | Yes |
| Government employees | Fully tax-free | Fully tax-free at retirement |
How gratuity is worked out
For most private employees: 15 days' wages for each year of service, or last basic + DA × 15 ÷ 26 × years. A part year of more than six months counts as a full year.
Example: a basic + DA of ₹60,000 a month and 8 years of service gives ₹60,000 × 15 ÷ 26 × 8 = ₹2,76,923.
From 21 November 2025, gratuity comes under the Code on Social Security, 2020. Wages for gratuity must be at least half your total pay, so if your basic is low, your gratuity can go up.
How much gratuity is tax-free
For private employees, the least of:
- the gratuity you actually got
- 15 ÷ 26 × last basic + DA × years of service
- ₹20 lakh, minus any tax-free gratuity from earlier jobs
Anything above that is added to your salary and taxed at your slab rate.
Leave encashment
Leave you cash in while you're still working is fully taxable, like salary. Leave you cash in when you resign or retire is tax-free up to the least of:
- the amount you received
- your unused earned leave (counted at no more than 30 days a year of service), valued at your average salary
- 10 months' average salary
- ₹25 lakh, minus anything exempted when you left an earlier job
Average salary means basic + DA (and commission at a fixed percentage of turnover) over the 10 months before you leave. HRA and other allowances aren't counted.
Part of it is taxable. Can you cut the tax?
If a lump sum pushes you into a higher slab, you can claim relief by filing Form 10E (FY 2025-26) or Form 39 (from tax year 2026-27) on the e-filing portal before you file your return.
Common questions
How much gratuity is tax-free?
For private employees, the least of the gratuity received, 15/26 of last basic + DA for each year of service, and ₹20 lakh minus tax-free gratuity from earlier jobs. Government employees pay no tax on gratuity.
Is leave encashment taxable when I resign?
Leave encashed when you resign or retire is tax-free up to the least of the amount, your unused leave at average salary, 10 months' average salary and ₹25 lakh. Leave cashed in while working is fully taxable.
Is gratuity tax-free under the new regime?
Yes. The gratuity and leave encashment exemptions work the same way under both regimes.
Is the ₹20 lakh gratuity limit per employer?
No. It's for your whole working life. Tax-free gratuity from an earlier job reduces what can be tax-free now.
Two ways to sort this
Do it yourself
- Check your last basic + DA and exact dates of service on your offer and relieving letters.
- Work out the tax-free part with our gratuity and leave encashment calculators.
- Check your full and final settlement and Form 16 show the exemption correctly.
- If part is taxable and pushes you into a higher slab, file Form 10E (or Form 39) before your return.
Let an expert do it
We check your full and final settlement, the exemption and any relief you can claim, before you sign.
The first chat is freeWork it out for yourself
- Gratuity: How much gratuity you'll get, and how much is tax-free.
- Leave encashment: Tax-free limit on leave you cash in.
- Salary in hand: Turn your CTC into the amount that reaches your bank.
Work out your gratuity and the tax-free part.
Open the gratuity calculatorSources
- Taxability of retirement benefits, Income Tax Department
- Leave encashment limit raised to ₹25 lakh (Notification 31/2023), Central Board of Direct Taxes
- Code on Social Security, 2020, section 53, Ministry of Labour and Employment
This guide explains the rules in general. For your own situation, .