Lost Your Job? ₹25L Gratuity Tax Rule Explained

If you're laid off, your severance pay is taxed like salary — but gratuity and leave encashment have separate tax exemptions up to set limits. Knowing the difference can save you lakhs.

Here's what happened: Severance or ex-gratia payments made during layoffs are treated as salary income and taxed at the individual's applicable income tax slab rate.. Gratuity received on separation is exempt from tax up to ₹25 lakh for private sector employees covered under the Payment of Gratuity Act, 1972.. Leave encashment at the time of job separation also qualifies for a separate tax exemption of up to ₹25 lakh for non-government employees under Section 10(10AA)..

What you should do: Ask your HR team to itemise your full-and-final settlement letter — list gratuity, leave encashment, notice pay, and ex-gratia separately so you can claim each exemption correctly.. Check your Form 16 or salary TDS certificate after your exit to verify that gratuity and leave encashment TDS was computed after applying the exemptions, not on the gross amount.. File your ITR carefully in the year of separation — report exempt components under the correct sections (10(10) for gratuity, 10(10AA) for leave encashment) to avoid a tax demand notice later..

If your total income including severance crosses ₹50 lakh in the exit year, factor in surcharge — a one-time FD or tax-loss harvest can bring it below the threshold and save you thousands extra.

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