Where to Show Leave Encashment & Gratuity in Your ITR (Exemption Limits Explained, AY 2026-27)

You left a job this year — resignation, layoff, or retirement — and your final settlement included leave encashment and gratuity. Now you're staring at the ITR portal wondering: where do these even go? Are they taxable? What if your employer taxed the whole thing? This is the guide for exactly those ten minutes of confusion, for AY 2026-27.

The two questions, answered upfront

Are they taxable? Partly. Both leave encashment and gratuity have generous exemption limits — ₹25 lakh and ₹20 lakh respectively for most private-sector employees — so for the majority of people, most or all of the amount is exempt. Where do they go in the ITR? The exempt portion goes under exempt allowances in the salary schedule; only the portion above the limits stays in taxable salary. Now the details, because the limits have conditions.

Leave encashment: the Section 10(10AA) rules

Encashment of earned leave at the time of leaving a job qualifies for exemption. (Leave encashed while still employed — some companies allow annual encashment — is fully taxable; no exemption.) For non-government employees, the exempt amount is the least of:

• The actual leave encashment received;
• ₹25 lakh (the lifetime limit, raised from ₹3 lakh in 2023 — a change many payroll systems and old articles still miss);
• 10 months' average salary (based on the last 10 months' basic + DA);
• Cash equivalent of unutilised leave, counting leave entitlement at a maximum of 30 days per completed year of service.

Government employees: fully exempt, no limit. Two fine points that trip people: the ₹25 lakh is a lifetime cap across all employers — if you claimed ₹10 lakh of exemption at one exit, ₹15 lakh of headroom remains for future exits. And "salary" for this formula means basic + DA (+ fixed commission), not your gross — so the 10-month cap is smaller than people assume.

Gratuity: the Section 10(10) rules

For employees covered by the Payment of Gratuity Act (most private-sector employees in establishments with 10+ people), the exempt amount is the least of:

• Actual gratuity received;
• ₹20 lakh (again, a lifetime cap);
• 15 days' salary (basic + DA) for every completed year of service — computed as salary ÷ 26 × 15 × years, with service beyond 6 months rounding up to a full year.

Government employees' gratuity is fully exempt. If you received gratuity from a past employer too, the ₹20 lakh lifetime cap counts both. And a 2026 note: under the new Labour Codes, fixed-term employees now earn pro-rata gratuity after just one year — if you were on a fixed-term contract and received gratuity for the first time, the same exemption structure applies to you.

Where exactly they go in the ITR

In ITR-1 or ITR-2, within the salary schedule:

• Your gross salary (from Form 16) may already include these amounts under Section 17(1) — check Form 16 Part B to see how your employer treated them.
• The exempt portions are reported under "Allowances to the extent exempt under Section 10" — select the specific dropdown items: Section 10(10) for death-cum-retirement gratuity and Section 10(10AA) for leave encashment, entering the exempt amount against each.
• The taxable excess (anything above the least-of computations) simply remains part of taxable salary — no separate line needed.

Cross-check against the pre-filled data: the portal often imports your employer's version, which is only as correct as your payroll team's exit processing.

If your employer taxed the whole amount

Common after layoffs and rushed exits: the F&F is processed with full TDS and the Form 16 shows no exemption. You can still claim the correct exemption in your ITR — the Form 16 reports what the employer did, not the ceiling of what you're entitled to. Compute the least-of amounts yourself, claim them under the Section 10 dropdowns, keep your settlement statement and service records as proof, and the excess TDS returns as a refund. (The same principle rescues over-taxed severance — see our severance tax guide for Section 10(10B) and Section 89 relief, which often apply to the same settlement.)

Regime note (this catches people)

Good news: these exemptions survive the new regime. Section 10(10) gratuity and 10(10AA) leave encashment on retirement/exit are among the exemptions available under both regimes — unlike HRA or LTA. So choosing the new regime (the default this year) does not cost you these; claim them regardless of regime.

Quick worked example

Priya exits after 8 years and 8 months. Basic + DA: ₹60,000/month. She receives leave encashment ₹4,00,000 (for 55 days of leave) and gratuity ₹3,50,000. Gratuity: 15/26 × 60,000 × 9 years (8y8m rounds up) = ₹3,11,538 exempt; ₹38,462 taxable. Leave encashment: least of ₹4,00,000 / ₹25,00,000 / ₹6,00,000 (10 months) / cash equivalent of eligible leave — here the actual ₹4,00,000 is within the other limits and the leave-balance cap, so likely fully exempt (subject to the 30-days-per-year computation). She enters ₹3,11,538 under 10(10) and the exempt encashment under 10(10AA); only ₹38,462 adds to taxable salary.

The 60-second version

Leave encashment at exit: exempt up to the least of actuals / ₹25 lakh lifetime / 10 months' basic+DA / 30-days-per-year leave balance — Section 10(10AA). Gratuity: least of actuals / ₹20 lakh lifetime / 15 days per year formula — Section 10(10). Both go under the "exempt under Section 10" dropdowns in the salary schedule; both survive the new regime; both can be claimed in the ITR even if your employer taxed everything — with the refund following. Encashment while still employed: fully taxable, no exemption. Deadline: July 31, 2026.

This article is general information for AY 2026-27, not tax advice. Employees not covered by the Payment of Gratuity Act have a slightly different gratuity formula; multiple exits in one year add complexity — a CA can confirm your specific computation.