EaseValueWhen you leave a job after a long stay, two payments arrive that are taxed unlike anything else you have ever received: gratuity, and encashment of the leave you never took. Neither is fully taxable and neither is fully exempt. Each is exempt only up to the lowest of several separate limits computed on quite different bases, and the balance is ordinary salary income taxed at your marginal rate. Most people meet these figures for the first time on a final settlement statement, at a moment when there is nothing left to decide. This calculator does the computation before that point. It works out the exempt and taxable parts of each payment separately, names which limb is actually binding on you — because that tells you whether anything can be done about it — and prices the tax on the balance against your other income for the year. It also handles the two features that generic gratuity calculators leave out and that change the answer most. The first is the five-year continuous-service condition: a private-sector gratuity paid before five years are complete is fully taxable, which makes the fourth anniversary of joining the most expensive resignation date in a salaried career. The second, and the reason this page exists, is that both monetary ceilings are lifetime ceilings. They are not per job, not per year, and not per employer. Whatever you exempted on an earlier exit is gone permanently, and a second exit is tested against whatever is left — which is why a mid-career job change can quietly make a retirement payout twenty years later far more taxable than anyone expects. The calculator asks what you have claimed before and prices the difference in rupees.
How it’s calculated
- Choose your employer type first, because it changes everything downstream. Central government, state government and local authority employees are treated separately and far more generously than everyone else. Most private establishments with ten or more employees are covered by the Payment of Gratuity Act, 1972; those outside it are computed on a different and usually less generous formula. Check your appointment letter rather than assuming.
- Choose why you are leaving. This affects gratuity only. The five-year continuous-service condition is waived where service ends because of death or disablement, so a short-service payout that would otherwise be fully taxable can still qualify for the exemption.
- Enter your completed years and the leftover months separately. The distinction matters: for an employer covered by the Gratuity Act a part-year of more than six months rounds up to a whole year, while for an employer outside the Act only completed years count and the fraction is simply dropped. Ten years and seven months is eleven years under the Act and ten years outside it.
- Enter your last drawn monthly basic + dearness allowance. Basic and DA only — not gross CTC, not house rent allowance, not other allowances, not bonus. Putting your full salary in this field will overstate your exemption substantially, and it is the single most common input error on any gratuity calculator.
- Enter your average monthly basic + DA over the last ten months. This drives the gratuity formula for employers outside the Act and both of the pay-based leave-encashment limits for everyone in the private sector. Leave it blank and the calculator reuses your last-drawn figure.
- Enter the gratuity actually received, gross, before any tax your employer deducted. Enter 0 if you are only working out leave encashment.
- Enter the leave encashment actually received — but only encashment paid at the time of leaving. Leave encashed while you are still in service is fully taxable as salary in every case, with no exemption of any kind, and does not belong in this box.
- Enter your unutilised leave in days and the days credited per year of service. Your employer may credit you 45 days a year, but the exemption is computed on a maximum of 30 days for each completed year. That per-year figure is left editable so you can test your own position rather than take a hard-coded number on trust.
- Check the lifetime ceilings. The figures currently in force are ₹20,00,000 for gratuity and ₹25,00,000 for leave encashment from a non-government employer. Both are notified amounts that have been revised more than once, so both are inputs here rather than hard-coded assertions — confirm the ceiling in force for your year of exit before relying on the output.
- Enter what you have already claimed in earlier jobs. This is the field that changes the answer most and the one every other calculator omits. If you have never claimed before, leave both at zero and read the note about keeping a record — you will need these figures again decades from now.
- Enter your other taxable income for the year: salary drawn up to the exit date, anything earned after it, interest, rent — everything else, after the standard deduction under Section 19 and any other deductions you are claiming. The taxable part of your payouts stacks on top of this, so this number decides the rate they are actually taxed at.
- Read the exempt and taxable rows for each payment, then the limb breakdown beneath them. The breakdown shows all the competing limits side by side and names the one that is binding. That is the diagnostic: if the formula binds, your employer is simply paying more than the statutory entitlement; if the ceiling binds, nothing can be restructured, because the ceiling is statutory and lifetime.
- Read the tax this exit costs you row and the two cap-left rows immediately beneath it. Those two figures are what you should write down and keep. They are all you will have left for every future employer combined, and no employer will ever tell you the number, because no employer knows it.
- Read the coloured boxes last. The first prices the lifetime-ceiling trap in rupees; the second explains the five-year condition or which limb is binding; the third covers the leave-encashment day cap and the fact that a taxable payout is taxed at your marginal rate rather than at any concessional retirement rate.
Gratuity: three limits, and only the lowest of them applies
Gratuity is a payment for long service, and the exemption attaching to it is one of the more generous reliefs in salary taxation. It is also one of the most misunderstood, because almost everyone assumes there is a single number — usually "twenty lakhs" — beyond which gratuity becomes taxable. There is no single number. The exemption for a non-government employee is the lowest of three separate figures, computed on entirely different bases, and in a great many real cases the figure that binds is not the monetary ceiling at all.
The first limit is a formula. For an employer covered by the Payment of Gratuity Act, 1972 it is fifteen days of your last drawn basic and dearness allowance for each year of service, the fifteen days being computed as fifteen twenty-sixths of a month because twenty-six is taken as the number of working days in a month. For an employer outside the Act it is half a month's average pay over your last ten months for each completed year of service. These produce materially different answers: 15/26ths is roughly 0.577 of a month against 0.500, so the Act limb is about fifteen per cent more generous per year of service before the rounding rules are even considered.
The second limit is simply the amount you actually received. Nothing about the exemption can exceed what was paid. Where this is the binding limb the answer is comfortable — your whole gratuity is exempt and neither the formula nor the ceiling has been reached.
The third is the monetary ceiling, currently ₹20,00,000 for a non-government employee. This is the figure everyone knows, and it is the one that binds least often in practice, because the formula usually produces a smaller number first. On the calculator above, an employee with twenty-five years of service and ₹80,000 of last drawn basic plus DA who receives a ₹20,00,000 gratuity finds that the formula caps the exemption at ₹11,53,846, leaving ₹8,46,154 taxable — the ceiling never comes into it. Their employer has been generous beyond the statutory entitlement, and the excess is ordinary salary income.
This is why naming the binding limb matters more than naming the number. If the formula binds, nothing can be restructured: your employer is paying above the statutory entitlement and the excess is taxable, full stop. If the amount received binds, you are fully covered. If the ceiling binds, the excess is taxable and no arrangement changes it, because the ceiling is statutory. The calculator prints all three side by side and says which one decided the answer, so that you can tell which of those three quite different situations you are actually in.
The five-year condition, and the most expensive resignation date in a salaried career
Gratuity from a non-government employer qualifies for exemption only where you have completed five years of continuous service. Below that threshold nothing is payable under the Payment of Gratuity Act at all, so an employer who pays anyway is paying an ex-gratia amount, and the whole of it is salary income taxed at your marginal rate. No formula applies, no ceiling is touched, and there is nothing to compute.
The practical consequence is stark and almost entirely unappreciated. An employee four years and eight months into a job, resigning, receives a ₹3,00,000 gratuity that is fully taxable — on the calculator above, with ₹10,00,000 of other income, that costs ₹78,000 of tax. Four months of additional service would have converted most of it to exempt. Nothing about the payment changes; only the date does. The fourth anniversary of joining is, for tax purposes, the worst possible moment to resign, and it is a moment that arrives for a very large number of people who are simply not thinking about gratuity when they accept a new offer.
The condition is not applied with complete rigidity, and where you are close it is worth getting the exact position checked rather than assumed. Continuous service has a statutory meaning that accommodates authorised leave, sickness, layoff and similar interruptions, and in several readings 240 days of actual work in the fifth year has been treated as sufficient to complete that year. Someone who is four years and nine months in, and who is being told flatly that they do not qualify, may well qualify. That is a question for a professional with the facts, not for a calculator, but knowing that the question exists is worth a great deal.
There is one clear exception. Where employment ends because of death or disablement, the continuous-service requirement does not apply and the exemption is computed on the ordinary limbs regardless of how short the service was. This relief is routinely missed by employers processing a final settlement, who deduct tax on the whole amount out of habit, and by families who have no reason to know it exists. Where tax has been over-deducted on such a payout, the position is corrected by claiming the exemption in the return and taking the refund. Gratuity paid to legal heirs raises further questions — which head of income it falls under, and whose return it belongs in — that are worth a professional conversation rather than a form.
One further point of sequencing. The five-year condition is tested against service with that employer, not against your total working life. Someone with twenty years of career experience across five employers, none of them lasting five years, has never once qualified. Job mobility has a tax cost that nobody puts in the offer letter, and it is not small.
Leave encashment: four limits, and the two that usually bind
Payment for accumulated unavailed leave, received when you leave, is exempt for a non-government employee up to the lowest of four figures rather than three. The additional limb is what makes this computation harder than gratuity and considerably harder to guess at.
The four are: the amount actually received; ten months' average pay, computed on the last ten months' basic and dearness allowance; the cash value of your unutilised leave, counted at no more than thirty days for each completed year of service and valued at that same average pay; and the monetary ceiling, currently ₹25,00,000. As with gratuity, the exemption is the lowest, and as with gratuity, the one that binds is very often not the one people expect.
The day cap is the first surprise. Many employers credit leave more generously than thirty days a year — forty-five is common in older organisations, and some public-sector-style structures are more generous still. The exemption does not follow your employer's policy. It is computed on a maximum of thirty days for each completed year, so an employee with twenty years of service and 900 days of accumulated leave is credited with 600 days for this purpose and the remaining 300 days of genuine, earned, unavailed leave fall entirely outside the exemption. That is not a technicality; on a large salary it is lakhs of rupees.
The ten-month ceiling is the second, and for long servers it is very often the binding limb. On the calculator above, an employee outside the Act with twenty years of service, ₹1,00,000 of average monthly pay and 300 days of accumulated leave receives ₹12,00,000 of leave encashment. The day cap is not reached — 300 days is well inside 30 × 20 — and the ₹25,00,000 ceiling is nowhere near. What binds is ten months' average pay, ₹10,00,000, leaving ₹2,00,000 taxable. No amount of leave accumulation would have improved that outcome, because the ten-month rule caps it independently of how much leave you had.
And the rule people find hardest to accept is the one about timing. Leave encashed while you are still in service is fully taxable, with no exemption of any kind. The relief attaches to encashment on retirement or resignation and nowhere else. Encashing leave mid-career for the cash, and encashing exactly the same leave on your last day, are taxed completely differently. For an employee with a substantial leave balance and a foreseeable exit, that difference is worth more than most of the tax planning they will do in the same year — and it costs nothing but patience.
The lifetime ceiling: the trap this calculator was built for
Both monetary ceilings — ₹20,00,000 for gratuity, ₹25,00,000 for leave encashment — are lifetime ceilings, aggregated across every employer you have ever had. They are not per job. They are not per year. They do not reset when you change employers, and they are not indexed to the length of your career. You get one allowance for the whole of your working life, and it is consumed in the order things happen to occur.
Almost nobody plans around this, for a simple reason: at the moment it matters, nobody has the information. Your new employer does not know what you exempted at your last job. Your payroll department computes the final settlement on the assumption that the full ceiling is available, because that is the only assumption it can make. The figure that determines your exposure is one that only you can produce, and only if you kept the papers from an exit that may have happened fifteen years earlier.
The calculator prices this directly. Take the twenty-five-year employee above with ₹80,000 of last drawn basic and DA receiving a ₹20,00,000 gratuity against ₹15,00,000 of other income. With a clean slate, the formula binds at ₹11,53,846 and the tax on the ₹8,46,154 balance is ₹1,88,800. Now suppose the same person exited a previous job mid-career and exempted ₹12,00,000 of gratuity then. Only ₹8,00,000 of ceiling remains, the ceiling now binds instead of the formula, ₹12,00,000 becomes taxable, and the tax is ₹2,96,400. The earlier claim has cost them ₹1,07,600 of extra tax on this exit alone — and their gratuity ceiling is now exhausted, so every future gratuity they receive is fully taxable in its entirety.
The shape of the trap is worth stating plainly, because it inverts what people assume. A career with one long job and one exit uses the ceiling once, at its most valuable moment. A career with three or four exits spends the ceiling on the earlier, smaller payouts and arrives at the largest payout — the retirement one, at the top of a career salary — with little or nothing left. The mobile professional, who is usually the higher earner, is the one the ceiling penalises. And there is no mechanism to reallocate it after the fact.
What to do about it is unglamorous but genuinely valuable. Keep a permanent record: for every exit, the amount received, the amount exempted, and the year. Keep it with your tax papers, not with your employment papers, because you will need it decades later when the employment papers are long gone. Where you have a choice about the sequence — for instance where an early payout is small and a later one will be large — understand that exempting the small one is not free. And where the ceiling is already exhausted, know it before the settlement is computed rather than after, because it changes what a taxable payout is really worth to you when you are negotiating the terms of an exit.
Government employees, and everybody who wrongly thinks they are one
The position of a government employee is not a more generous version of the private-sector rule. It is a different rule entirely. Gratuity received by an employee of the central government, a state government or a local authority is exempt in full, and so is leave encashment on retirement. There is no formula, no per-day cap, no ten-month rule and no monetary ceiling. The five-year continuous-service condition is a feature of the non-government exemption and does not apply. On the calculator above, a government employee retiring with ₹30,00,000 of gratuity and ₹20,00,000 of leave encashment keeps the entire ₹50,00,000 with nothing taxable.
A consequence that is easy to miss follows from this: because no ceiling is engaged, nothing a government employee receives consumes anything. A government retiree who later takes private employment and exits from it computes that later exemption on the ordinary limbs with the full private ceiling intact. The government exemption does not eat into it.
The critical question is therefore whether you are a government employee for this purpose, and a very large number of people answer it wrongly. Employees of public sector undertakings, nationalised banks, statutory corporations, universities, and government-funded autonomous bodies are not government employees for this purpose, however governmental the employer feels and however the employment is described in ordinary speech. They are computed on the private-sector limbs, with the formula, the ten-month rule, the day cap and the monetary ceiling all applying in the ordinary way. Someone who spends a career at a nationalised bank and assumes their retirement payout is fully exempt can meet a very large and very unwelcome number on a final settlement statement.
There is a further intermediate category worth knowing about, though this calculator does not model it. Employees of certain government-established bodies covered by particular pension and gratuity rules can be in a distinct position from both the ordinary government employee and the ordinary private employee. If your employer is an autonomous body, a regulator, a statutory authority, or an entity created by its own statute, the classification is worth confirming with someone who can read the relevant rules against your service conditions, rather than assuming either answer. The amounts at stake make it worth an hour of professional time.
What payroll gets wrong, and what the return is for
Your employer applies these exemptions when deducting tax from your final settlement, and employers get them wrong in both directions with some regularity. Over-deduction is the more common error and the more visible one: payroll systems handle short-service gratuity, death and disablement cases, and non-Act computations poorly, and the default behaviour when a system is unsure is to deduct. Under-deduction is rarer but more painful, because it arrives as a demand rather than as a delay — and its usual cause is the one this page is about, an earlier claim that has already eaten the ceiling and that your current employer had no way of knowing about.
Either way, the return is where it is settled. The exemption is yours to claim on the correct figures whatever your employer withheld, and where more was deducted than was due, the excess comes back as a refund. Where less was deducted, the balance is payable, and it is worth knowing that before the year ends rather than at filing time, because a large shortfall discovered in July also brings interest under Sections 424 and 425 with it. Running this calculation at the point of exit, rather than at the point of filing, is the whole difference between a planned payment and a surprise.
Three practical points on documentation. First, get the settlement statement in writing, broken down by component — gratuity, leave encashment, notice pay, ex-gratia, bonus — because these are taxed differently and a lump-sum figure cannot be computed. Second, reconcile against Form 16 and the annual information statement, since what your employer reported is what the system will match your return against, and a mismatch between your claim and their reporting is the fastest route to a query. Third, keep the exemption computation itself, not merely the settlement statement: what you will need at a future exit is the amount exempted, and that figure appears nowhere on the payslip.
One timing observation for anyone whose exit date is genuinely negotiable. The taxable part of these payouts is taxed at your marginal rate, and it stacks on top of whatever else you have earned that year. An exit late in a financial year, after a full year of salary has already been drawn, lands the payout in the worst possible year. The same payout received a few weeks later, in a year when your income will be lower — because you are retiring, or taking a break, or moving to a lower-paid role — can be taxed several bands lower. Where the settlement date is negotiable, and it more often is than people assume, that is a conversation to have before the exit is finalised rather than after.
What this calculator does not model, and where to be careful
The figures on this page are computed for a resident individual under the new regime, using the rate structure for FY 2025-26: nil to ₹4 lakh, then 5%, 10%, 15%, 20%, 25% and 30% in ₹4 lakh steps, with the rebate under Section 156 and its marginal relief, the surcharge ladder from ₹50 lakh with marginal relief, and 4% cess. Retirement payouts are salary income, so the full surcharge ladder applies to them — the 15% cap that limits surcharge on capital gains and dividends has no application here, and a large settlement crossing ₹50 lakh attracts surcharge on the whole of the tax rather than only on the excess.
A deliberate omission on section numbering deserves stating plainly. Throughout this page the two reliefs are described in words — "the gratuity exemption, formerly Section 10(10)" and "the leave-encashment exemption, formerly Section 10(10AA)" — rather than by an Income-tax Act, 2025 section number. That is not an oversight. The corresponding provisions of the 2025 Act have not been verified against the enacted text for the purposes of this page, and on a firm's own public tool an unverified section number is worse than no section number at all. Where a provision has been verified it is cited: the standard deduction under Section 19, the rebate under Section 156, and interest under Sections 424 and 425.
Both monetary ceilings are inputs rather than hard-coded figures, for the same reason. ₹20,00,000 for gratuity and ₹25,00,000 for leave encashment are the amounts currently in force, and both have been revised more than once — the leave-encashment ceiling notably so, having stood at a far lower figure for many years before a substantial upward revision. Confirm the ceiling applicable to your year of exit and change the field if it differs. The same applies to the thirty-day annual leave credit, which is also editable.
Several payments that arrive with the same settlement are outside this calculator entirely, and each is relieved on a different basis: commuted pension, retrenchment compensation, compensation under a voluntary retirement scheme, provident fund withdrawal, notice-pay recovery, and any ex-gratia or severance amount described as such. Nor does it model the old regime, a non-resident, a senior citizen's different exemption limit, or the position of a partner or director rather than an employee. Where your settlement contains any of those components, the figures here answer only the part of it they address.
Finally, treat the output as a well-informed estimate to take into a conversation, not as a filing position. The two variables most likely to move the answer are ones this tool has to take on trust from you: whether your employer is genuinely covered by the Payment of Gratuity Act, and how much of the lifetime ceiling you have already spent. Both are questions of fact rather than of computation, both are worth establishing properly before an exit rather than after it, and both are capable of changing the tax on a retirement payout by several lakh rupees.
Frequently asked questions
Is my gratuity tax-free up to ₹20 lakh?
Not necessarily, and for most people the ceiling is not what decides it. For a non-government employee the exemption is the lowest of three figures: a formula based on your pay and years of service, the amount actually received, and the ₹20,00,000 lifetime ceiling. The formula usually produces the smallest number. An employee with 25 years of service and ₹80,000 of last drawn basic plus DA who receives ₹20,00,000 is exempt on only ₹11,53,846 — the formula binds and the ceiling never comes into it. Government employees are the exception: their gratuity is exempt in full with no ceiling at all.
I claimed the exemption at my last job. Does it affect this one?
Yes, and this is the single most consequential thing on this page. Both ceilings are lifetime ceilings aggregated across every employer you have ever had — not per job, not per year. Whatever you exempted before is permanently gone, and this exit is tested against what remains. On the worked example above, having exempted ₹12,00,000 at an earlier job turns a ₹1,88,800 tax bill into ₹2,96,400 — ₹1,07,600 of extra tax — and exhausts the ceiling entirely, so every future gratuity is then fully taxable. No employer will warn you about this, because no employer knows what you claimed elsewhere.
I am resigning after four and a half years. What happens to my gratuity?
It is fully taxable. Gratuity from a non-government employer qualifies for exemption only after five years of continuous service; below that nothing is payable under the Payment of Gratuity Act, so anything your employer pays is ex-gratia and taxed as ordinary salary. This makes the fourth anniversary of joining the most expensive resignation date in a salaried career. If you are close, note that continuous service has a statutory meaning that accommodates authorised leave and interruptions, and that in several readings 240 days of work in the fifth year has been treated as completing it — worth getting checked with the actual facts rather than assumed.
Does the five-year rule ever get waived?
Yes, where employment ends because of death or disablement. In those cases the continuous-service requirement does not apply and the exemption is computed on the ordinary limbs however short the service. Employers processing a final settlement frequently miss this and deduct tax on the whole amount, and families have no reason to know it exists. Where tax has been over-deducted, the exemption is claimed in the return and the excess comes back as a refund. Gratuity paid to legal heirs raises further questions about which head of income it falls under and whose return it belongs in, which are worth professional advice.
How much of my leave encashment is exempt?
For a non-government employee, the lowest of four figures: the amount received, ten months' average pay, the cash value of your unutilised leave counted at no more than 30 days per completed year of service, and the ₹25,00,000 lifetime ceiling. The day cap surprises people whose employer credits leave more generously than 30 days a year — the exemption follows the statutory 30, not your employer's policy. For long servers the ten-month rule is very often the binding limb: with ₹1,00,000 of average pay it caps the exemption at ₹10,00,000 regardless of how much leave you accumulated.
Can I encash leave now instead of waiting until I leave?
You can, but it is taxed completely differently. Leave encashed while you are still in service is fully taxable, with no exemption of any kind — the relief attaches only to encashment on retirement or resignation. The same leave, encashed on your last day rather than mid-career, can be largely or wholly exempt. For an employee with a substantial leave balance and a foreseeable exit, waiting is worth more than most of the tax planning they will do that year, and it costs nothing but patience.
I work for a public sector bank. Am I a government employee for this?
Almost certainly not. The full exemption applies to employees of the central government, a state government or a local authority. Employees of public sector undertakings, nationalised banks, statutory corporations, universities and government-funded autonomous bodies are computed on the private-sector limbs — the formula, the ten-month rule, the day cap and the monetary ceilings all apply in the ordinary way. This is a common and expensive misunderstanding at retirement. If your employer is an autonomous body or created by its own statute, get the classification confirmed against your actual service rules rather than assuming either answer.
My employer deducted tax on the whole settlement. Is that final?
No. What your employer withheld is not the same as what you owe, and the return is where it is settled. Payroll systems handle short-service gratuity, death and disablement cases and non-Act computations poorly, and the default when a system is unsure is to deduct — so over-deduction is common and the excess comes back as a refund when you claim the correct exemption. Under-deduction happens too, usually because an earlier claim had already consumed the ceiling and your employer had no way of knowing. Get the settlement statement broken down by component, reconcile it against Form 16 and your annual information statement, and keep the exemption computation itself — that last figure is what a future exit will need.
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