Retirement Payouts Tax: Gratuity ₹20L, Leave ₹25L, VRS, Commutation
Private employees: gratuity exempt to ₹20L, leave to ₹25L (lifetime caps, independent, both regimes). Govt: fully exempt. VRS ₹5L, commutation ⅓–½, family pension ⅓–₹25k — all below.
Exit payouts at a glance (non-govt)
| Payout | Exempt up to | Key condition |
|---|---|---|
| Gratuity — 10(10) | ₹20 lakh (lifetime) | 5 yrs service (waived on death/disablement); formula 15×salary×yrs÷26 |
| Leave encashment — 10(10AA) | ₹25 lakh (lifetime) | At exit only — in-service encashment fully taxable (89 relief may help) |
| VRS — 10(10C) | ₹5 lakh | Once; 10 yrs service or age 40+, scheme conditions |
| Retrenchment — 10(10B) | ₹5 lakh | Least-of formula incl. 15 days' pay × years |
| Pension commutation — 10(10A) | ⅓ (got gratuity) / ½ (no gratuity) | Of commuted value; uncommuted pension = salary |
| Family pension (heirs) | ⅓ or ₹15k old / ₹25k new | Taxed as Other Sources, not salary |
Retirement payouts: exempt caps at a glance
| Payout | Exempt up to | Section |
|---|---|---|
| Gratuity (govt) | Fully exempt | 10(10) |
| Gratuity (private, covered) | ₹20,00,000 (lifetime) | 10(10) |
| Leave encashment (govt) | Fully exempt | 10(10AA) |
| Leave encashment (private) | ₹25,00,000 (lifetime, Budget 2023) | 10(10AA) |
| VRS compensation | ₹5,00,000 | 10(10C) |
| Commuted pension (with gratuity) | 1/3 of pension value | 10(10A) |
| Commuted pension (no gratuity) | 1/2 of pension value | 10(10A) |
The lifetime-caps trap: gratuity's ₹20L and leave's ₹25L are LIFETIME limits across all employers. Changed 3 jobs and encashed leave twice? Those old exemptions already ate part of your cap — the final employer's payout gets only the remainder.
By TaxSetu Editorial Team · Last reviewed: 7 October 2026
Based on the Income-tax Act 2025, Income Tax Rules 2026 and CBDT notifications; sections per the Income-tax Act 1961 (as amended) with 2025-Act mappings where notified · Verify on the official portal: incometax.gov.in
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Frequently Asked Questions
₹20 lakh lifetime, after 5 years of service (waived on death/disablement) — in both regimes. Government employees are fully exempt.
₹25 lakh lifetime at exit for non-government employees (both regimes). In-service encashment is fully taxable — 89 relief may help. 89 relief.
No — for gratuity/leave they count as private employees with the ₹20L/₹25L caps.
Exempt to ⅓ of commuted value if you also got gratuity, ½ if not. Uncommuted monthly pension is salary. Retiree guide.