₹25 Lakh Leave Encashment vs ₹25 Lakh Gratuity Ceiling
Two rules, both landing on ₹25 lakh, about two completely different things — and a third figure, ₹20 lakh, that gets pulled into the same confusion. Here's exactly which number applies to what.
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Work out your gratuity amount separately — it has its own exemption rule, not this one.
The short answer
₹25 lakh — leave encashment tax exemption (Section 10(10AA)(ii), private-sector, lifetime cap, per CBDT Notification 31/2023). ₹25 lakh — central government gratuity payment ceiling (a service-rules cap on the payout itself, not a tax rule — government employees' gratuity is tax-exempt with no ceiling regardless). These are unrelated rules from different frameworks that happen to share a number. A third figure, ₹20 lakh, is the actual private-sector gratuity tax exemption (Section 10(10)(iii)) — a different rule again, and the one most often confused with both ₹25 lakh figures.
Three numbers, laid out side by side
| Figure | What it actually is | Applies to | Type of rule |
|---|---|---|---|
| ₹25 lakh | Leave encashment tax exemption ceiling, Section 10(10AA)(ii) | Private-sector employees, lifetime | Income tax rule |
| ₹25 lakh | Maximum gratuity payout under central government service rules, revised Jan 2024 | Central government employees only | Service rule, not a tax rule |
| ₹20 lakh | Gratuity tax exemption ceiling, Section 10(10)(iii) | Private-sector employees, lifetime | Income tax rule |
Why the two ₹25 lakh figures get confused
Both numbers surface in searches about "exit-time payouts" or "retirement tax," both are exactly ₹25,00,000, and both were revised within about a year of each other — the leave encashment figure via CBDT Notification 31/2023 (effective 1 April 2023), the government gratuity payout ceiling via a service-rules revision effective January 2024. That closeness in timing and value makes them easy to cite interchangeably, even though one is an income tax exemption limit that applies to private-sector leave encashment, and the other is a government pay-scale ceiling on gratuity payouts that has nothing to do with income tax at all. See the gratuity tax exemption limit page for the government-gratuity ₹25 lakh figure specifically, sourced and explained on its own terms.
Why the ₹20 lakh and ₹25 lakh (leave encashment) figures get confused
This pairing is different: it's not two identical numbers, it's two different numbers for two parallel exemptions — gratuity and leave encashment are both exit-time entitlements, both have a private-sector lifetime tax exemption cap, and both are set under nearby subsections of the same Section 10 (10(10) for gratuity, 10(10AA) for leave encashment). It's easy to remember "there's a lifetime exemption limit around exit pay" and misremember which number goes with which entitlement. They're independently set, independently revised, and there's no rule linking them — a private-sector employee could in principle have up to ₹20 lakh of gratuity exemption AND up to ₹25 lakh of leave encashment exemption available, at the same time, because they're separate ceilings under separate sections.
A quick way to check which one applies to you
- Is the payout for unused leave you accumulated? That's leave encashment — Section 10(10AA), ₹25 lakh cap if you're not a government employee.
- Is the payout a lump sum tied to years of continuous service, separate from any leave balance? That's gratuity — Section 10(10), ₹20 lakh cap if you're not a government employee.
- Are you a central government employee asking about a maximum gratuity amount, not a tax exemption? That's the ₹25 lakh service-rules payout ceiling — not a tax figure, and not relevant to your tax return at all, since government gratuity is tax-exempt regardless of amount.
Related reading
- Leave encashment tax exemption explained — the full ₹25 lakh leave-encashment rule, worked through.
- The ₹20 lakh gratuity tax exemption limit — the gratuity-side rule, including its own ₹25 lakh government-payout distinction.
- Government vs private-sector leave encashment tax treatment — the full-exemption-vs-capped split for leave encashment specifically.
- Is gratuity taxable in India? — the broader gratuity taxability picture.
FAQ
No — they're unrelated rules that happen to share a number. The ₹25 lakh leave encashment figure is an income-tax exemption ceiling (Section 10(10AA)(ii)) for private-sector employees. The ₹25 lakh gratuity figure is a maximum payout ceiling under central government service rules — not a tax rule at all, and irrelevant to income tax since government gratuity is already fully tax-exempt regardless of amount.
No — it's a third, separate figure: the private-sector gratuity tax exemption under Section 10(10)(iii). It's a parallel rule to the leave encashment exemption (both are exit-time, lifetime, private-sector caps), but independently set at a different amount under a different section.
Yes — they're separate ceilings under separate sections with no rule linking them. A private-sector employee could in principle have the full ₹20 lakh gratuity exemption and the full ₹25 lakh leave encashment exemption available simultaneously.
Last verified: 17 Aug 2026
Sources: PIB press release on CBDT Notification No. 31/2023 (leave encashment ₹25 lakh, fetched directly); Section 10(10)(iii) and 10(10AA) of the Income Tax Act, 1961. The government gratuity ₹25 lakh payout-ceiling figure is sourced on the gratuity tax exemption limit page, which carries its own citation for that figure specifically.
This is indicative information, not tax advice. Confirm which rule applies to your specific payout with your employer's payroll team or a qualified tax professional before filing or making financial decisions.