Retrenched? Your ₹5L+ Payout May Be Tax-Free

If you lost your job or retired with unpaid leave, Indian tax law lets you claim full exemption on retrenchment compensation and leave encashment. Many employees miss this benefit — costing them lakhs in unnecessary tax.

Here's what happened: Under Section 10(10B), retrenchment compensation received by a retrenched employee is fully or partially exempt from income tax up to prescribed limits.. Section 10(10AA) exempts leave encashment received at retirement or resignation — up to ₹25 lakh for non-government employees as per the latest revised limit.. Courts have consistently held that employees cannot be denied lawful tax exemptions on procedural grounds like delayed filing or employer-side errors..

What you should do: Check your Form 16 or salary slip to confirm whether your employer correctly applied Section 10(10B) or 10(10AA) exemption before deducting TDS.. File a revised ITR if you received retrenchment pay or leave encashment but paid tax on it — you can claim a refund for the over-deducted amount.. Collect all documents — retrenchment letter, leave encashment calculation sheet, Form 16 — before filing your ITR or approaching an income tax officer..

The ₹25 lakh leave encashment exemption limit was revised upward in 2023 — if you retired before or after and used the old ₹3 lakh limit, file a revised return immediately.

For readers weighing their credit and loan options, our personal loan guide and CIBIL score resources put this update in context.