Can We Claim Exemption on Gratuity and Leave Encashment under the New Tax Regime?

Ramesh works in a private company and earns ₹12 lakh per year. As the financial year was ending, he was reminded to plan his taxes. His HR told him:

“Ramesh, you have to choose — Old Tax Regime or New Tax Regime. If you don’t decide, the system will auto-select the new regime.

Ramesh got confused. A question popped into his head:

“If I opt for the new tax regime, will I still get exemption on gratuity and leave encashment?”

Let’s understand this clearly through Ramesh’s journey…

Ramesh wondered — the new regime doesn’t allow deductions, but does gratuity and leave encashment still remain tax-free?

Gratuity – Still Exempt under New Tax Regime

Private Sector – Covered under Payment of Gratuity Act

If Ramesh’s company is covered under the Payment of Gratuity Act, then the gratuity he receives is exempt up to

• ₹20 lakh (as per FY 2023-24).
• Even if Ramesh opts for the new tax regime, this exemption is still available.

Gratuity is a retirement benefit, and the exemption comes under Section 10(10) of the Income Tax Act. It is classified as a specific exemption, not a deduction — hence, it remains valid even under the new tax regime also to calculate gratuity there are Gratuity calculator you can use the same to know your Gratuity amount.

Leave Encashment – Also Exempt in New Regime

Ramesh had 150 days of unused leave. Upon retirement, he will receive money for those leaves — but the question is:

“Will I have to pay tax on that amount?” If Ramesh is a private sector employee, and he retires, the leave encashment he receives is exempt up to:

• ₹25 lakh (limit revised in 2023).
• This exemption is also available under Section 10(10AA)

The best part? This exemption is also allowed under the New Tax Regime.

Deduction vs Exemption

Lets make it more clear -Assume Ramesh retires and receives:

• Gratuity: ₹18 lakh
• Leave Encashment: ₹20 lakh

In the Old Tax Regime:

• Gratuity: ₹18 lakh (exempt)
• Leave Encashment: ₹20 lakh – Fully exempt (within ₹25 lakh limit)

In the New Tax Regime

• Gratuity: ₹18 lakh (exempt)
• Leave Encashment: ₹20 lakh – Fully exempt (same rule)