Moment guide · FY 2026-27
I'm retiring or taking VRS
How much of my gratuity, leave encashment and VRS payment is tax-free?
Three separate exit benefits, each with its own limit: gratuity ₹20L exempt (private sector), leave encashment ₹25L exempt on retirement, VRS ₹5L exempt if scheme is approved. All three are available in BOTH old and new regimes. VRS exemption and 89(1) relief cannot be claimed on the same amount.
Your legitimate options
Every route the statute actually gives you — with its condition, cap and deadline.
| Route | Condition | Cap / deadline |
|---|---|---|
| Gratuity — private sector | 5+ years of continuous service | ₹20 lakh exempt u/s 10(10)(ii); excess taxable as salary |
| Gratuity — government | Government or notified employer | Fully exempt u/s 10(10)(i); no cap |
| Leave encashment on retirement | Retirement or resignation from private sector | ₹25 lakh exempt u/s 10(10AA)(ii); excess taxable |
| VRS payment | Approved voluntary retirement scheme from eligible employer | ₹5 lakh exempt u/s 10(10C); cannot combine with 89(1) relief on same amount |
| Arrears relief u/s 89(1) | Received a large lump sum in one year that relates to multiple past years | Tax recomputed across years of accrual; Form 10E mandatory before filing |
The #1 trap
You cannot claim BOTH the VRS exemption u/s 10(10C) AND the arrears relief u/s 89(1) on the same VRS amount — the statute explicitly bars double relief on the same sum.
The decision path
Follow it top to bottom — the first condition that matches is your answer.
Worked example
Suresh, 58, senior manager at a PSU, taking VRS
Suresh retires from a public sector company under an approved VRS scheme in March 2027. He receives: Gratuity = ₹22L, Leave encashment = ₹18L, VRS payment = ₹8L, Last month salary = ₹1.2L. Tax treatment: Gratuity: PSU is a notified employer — but u/s 10(10)(ii), the ₹20L cap applies for non-government employees. PSUs are generally treated as private sector for this purpose. Exempt = ₹20L. Taxable gratuity = ₹2L. Leave encashment: ₹18L received at retirement. Cap is ₹25L — fully exempt since ₹18L < ₹25L. Taxable = ₹0. VRS payment: ₹8L received under approved scheme. Exempt u/s 10(10C) = ₹5L. Taxable VRS = ₹3L. Total taxable income from these: ₹2L (excess gratuity) + ₹0 (leave) + ₹3L (excess VRS) + ₹1.2L (salary) = ₹6.2L. Suresh wants to claim 89(1) relief on the ₹3L taxable VRS (it relates to 15 years of service). He cannot — s.10(10C) specifically bars 89(1) on the same VRS amount. He can claim 89(1) only on the ₹2L taxable gratuity. Final income: ₹6.2L. Under new regime (no deductions): tax ≈ ₹34,500. Under old regime with 80C and 80D: potentially lower. Suresh should file Form 10E for the gratuity arrears relief before filing his ITR. A quick call with us dials in the final figure.
Questions people actually ask
Sections: 10(10), 10(10AA), 10(10C), 89(1) · Last verified 2026-08-11 · Reviewed by Harun Raaj & Associates, Chartered Accountants. Every figure cites the Income-tax Act, 1961 (with ITA 2025 mapping via our section index).