Gratuity and Leave Encashment: Are They Taxable When You Resign or Retire?

I want to know regarding gratuity and leave encashment, whether they are taxable or not taxable during resignation and retirement.

Taxability of Leave Encashment

Leave encashment of accumulated leave is taxable as follows:

- If you are not a central or state government employee, leave encashment is actually received as 10 months average salary, ₹300,000, or cash equivalent of unavailed leave on the basis of 30 days leave for each year of completed service. Section 10(10AA) of the IT Act is relevant. Salary here means Basic + Dearness Allowance + turnover-based commission. This is for information.

However, cross-check with your CA before acting upon this advice for your satisfaction.

Answer to you is as follows:

Gratuity at the Time of Resignation and Retirement

- For Government employees: No tax.
- For other than Government employees or Gratuity as per the POG Act: Exemption up to Rs. 10 lacs.
- If gratuity was received in earlier years, the exemption at the time of retirement will reduce to that extent, subject to the overall limit of 10 lacs.

Leave Encashment on Resignation and Retirement

- For Government employees: No tax.
- For other than Government employees: Exemption on the least of the following:
- Leave encashment actually received.
- Average salary of 10 months.
- Equivalent to a maximum of 30 days of unavailed leave, if any, per every year of completed service.
- Rs. 3 lacs.

Salary for this purpose is only Basic + DA.

Feel free to correct me if I am mistaken.

Regards