Cashing Out of an Indian Job Before You Move Abroad: How Gratuity, Leave Encashment and Pension Lump Sums Are Taxed

You have handed in your notice, the relocation date is set, and HR sends you a final-settlement sheet with four numbers on it: gratuity, leave encashment, a provident fund balance, and in some cases a pension option. Between the flight booking and the visa paperwork, almost nobody stops to ask how those four numbers are taxed, and the assumption that "it is a retirement benefit, so it must be tax-free" is wrong often enough to cost real money. The cash that lands in your account on the way out is not automatically exempt. Most of it is exempt up to a ceiling, and the amount above the ceiling is taxed as salary in the year you receive it.

The timing makes this sharper than an ordinary tax question. You receive these lump sums in the same financial year you stop being an Indian taxpayer in any practical sense, and the natural instinct is to treat yourself as already gone. The Income Tax Act does not see it that way. For the year you leave, you are almost always still a resident, taxed on a resident return, and your exit payments sit squarely on that return. Getting the exemptions right on that final resident filing is the difference between a clean exit and a notice arriving in your inbox eighteen months after you have settled into a new country.

The 30-second answer: When you leave an Indian job to move abroad, gratuity is exempt under Section 10(10) up to a lifetime cap of Rs 20,00,000 for a non-government employee, the least of actual gratuity, Rs 20,00,000, or the formula (last basic plus DA times completed years times 15/26 if covered by the Payment of Gratuity Act). Leave encashment is exempt under Section 10(10AA) up to Rs 25,00,000, raised from Rs 3,00,000 by CBDT Notification 31/2023 from April 1, 2023, as the least of four figures. A commuted pension is exempt under Section 10(10A) (one-third or one-half for private employees), while uncommuted monthly pension is fully taxed as salary. Both caps are lifetime, across all employers, not per-employer. In the year you leave you are usually still a resident, so all of this is taxed on a resident return; only from the next year are you an NRI taxed on Indian-source income alone.

This guide is part of our NRI tax-filing series. For assembling the whole return, start with the NRI ITR filing guide for AY 2026-27, then come back here for the exit-payment detail.

What follows works through each of the four exit payments in turn, with the section, the ceiling, the formula and a worked example in rupees. It covers gratuity under Section 10(10) and the Rs 20,00,000 lifetime cap, leave encashment under Section 10(10AA) and the Rs 25,00,000 ceiling that was raised in 2023, the commuted-pension exemption under Section 10(10A), and the uncommuted monthly pension that is simply taxed as salary. It then deals with the part of this that NRIs get wrong most often: how you are actually taxed in the year you leave, while you are still a resident for the bulk of it, and how a pension that starts paying after you have emigrated is treated under the DTAA. One note on dates before we start: AY 2026-27 covers income earned in FY 2025-26, governed by the Income Tax Act 1961, so the section numbers below, 10(10), 10(10A), 10(10AA), are the live ones for the return you file by July 2026. The Income Tax Act 2025 renumbers several of these from April 1, 2026, and the amounts carry across unchanged.

First, fix the year you actually leave

Before any of the exemptions matter, you have to be honest about your residential status in the year you walk out, because that decides which return your exit payments land on and how much else gets pulled in with them.

Under Section 6 of the Income Tax Act, your residential status is determined for the whole financial year, April to March, as a single status. India does not formally split the year into a resident period and a non-resident period the way some countries do. You are either a resident for the entire year or a non-resident for the entire year, decided by the day-count tests. The basic test is 182 days or more of physical presence in India in the financial year, which makes you a resident; there is also a 60-day-plus-365-days-over-four-years test, with relaxations for an Indian citizen leaving India for employment abroad.

Here is the practical consequence almost everyone misses. If you leave in, say, October, you have already spent roughly six months of the financial year in India before departing. For that year you are very likely still a resident of India, because you were here for 182 days or more before you left. That means the financial year of your departure is a resident year, and your gratuity, leave encashment and any commuted pension are taxed on a resident return for that year, not an NRI return. You only become an NRI from the following financial year, once you spend enough of a full year abroad to fail the resident tests.

There is one important softening for people leaving for a job abroad. An Indian citizen who leaves India for the purpose of employment outside India is judged against the 182-day test only, not the lower 60-day threshold. So if you genuinely leave for a job and spend fewer than 182 days in India in the departure year, you can be a non-resident even in that year. But for most people leaving mid-year after working the first half in India, the 182-day count is already crossed by the time they board the flight, so they remain resident for the departure year. Count your days carefully against the tests in NRI residency and RNOR rules before you assume anything, because the answer drives everything below.

Why this matters for the exit payments: as a resident in the departure year, your worldwide income for that year is in principle taxable in India, including salary you earn abroad after you leave, subject to DTAA relief. As an NRI in the following year, only Indian-source income is taxed. The exit lump sums are received while you are still resident, so they sit on the resident return regardless, but the surrounding income picture is very different depending on which side of the line your departure year falls.

Gratuity: Section 10(10) and the Rs 20,00,000 lifetime cap

Gratuity is the statutory thank-you for service, payable when you leave after completing the qualifying period, generally five years of continuous service under the Payment of Gratuity Act, 1972, though it is also payable on death or disablement before five years. When you resign to move abroad after five years or more, your gratuity is paid as part of the final settlement, and its tax treatment is governed by Section 10(10).

The treatment splits cleanly by employer type.

Government employees, central, state, defence and local-authority service, receive gratuity that is fully exempt under Section 10(10)(i), with no ceiling. The whole amount is tax-free. If you are leaving a government post to move abroad, the gratuity question is closed; it is exempt in full.

Non-government employees get a capped exemption, and the cap is the number to memorise: Rs 20,00,000. This ceiling was raised from Rs 10,00,000 to Rs 20,00,000 for employees retiring, resigning or otherwise ceasing employment on or after March 29, 2018. The exemption is the least of three figures:

1. The actual gratuity received.
2. Rs 20,00,000 (the lifetime statutory ceiling).
3. The formula amount, which depends on whether you are covered by the Payment of Gratuity Act.

For an employee covered by the Payment of Gratuity Act, 1972, the formula amount is:

Last drawn salary (basic plus dearness allowance) times completed years of service times 15/26.

Here, any service of more than six months in the final year counts as a full year, and the 15/26 reflects fifteen days of salary for each year, treating a month as twenty-six working days.

For an employee not covered by the Act, the formula amount is:

Half a month's average salary (average of the last ten months) times completed years of service.

Here only completed years count; a fraction of a year is ignored, and there is no rounding up of part-years.

Whatever the exempt figure works out to, anything above it is taxable as salary in the year of receipt, taxed at your slab rate.

The Rs 20,00,000 cap is a lifetime ceiling, not a per-job one

This is the single most expensive thing people miss. The Rs 20,00,000 ceiling applies to the aggregate of all gratuity you receive across your whole working life, from one employer or several, in the same year or across different years. It is not refreshed each time you change jobs.

So if you received Rs 12,00,000 of exempt gratuity from an earlier employer years ago, you have only Rs 8,00,000 of exemption headroom left when you collect gratuity from your current employer on the way out. The cap is cumulative across your career. People who changed jobs two or three times and collected gratuity each time often assume each payout gets a fresh Rs 20,00,000 shelter. It does not. The lifetime aggregate is the rule, and it catches senior professionals with long, multi-employer careers precisely at the moment they are cashing out the largest gratuity of their lives.

Worked example: gratuity exemption on exit

Take Arjun, a private-sector employee covered by the Payment of Gratuity Act, leaving his Mumbai job in October 2025 to take up a role in Dubai. His last drawn basic plus DA is Rs 1,20,000 a month, he has completed 18 years and 8 months of service, and the company pays him a gratuity of Rs 13,00,000. He has never received gratuity before, so his full Rs 20,00,000 ceiling is intact.

Work the three figures:

1. Actual gratuity received: Rs 13,00,000.
2. Statutory ceiling: Rs 20,00,000.
3. Formula: Rs 1,20,000 times 19 completed years (the 8 months rounds the 18 up to 19) times 15/26.
   • Rs 1,20,000 times 19 equals Rs 22,80,000.
   • Rs 22,80,000 times 15/26 equals Rs 13,15,385.

The exempt amount is the least of the three, which is the actual gratuity of Rs 13,00,000. So Arjun's entire Rs 13,00,000 gratuity is exempt, and nothing is taxable. The formula generated a slightly higher figure than he actually received, and the ceiling is higher still, so the actual amount wins and the whole payment is tax-free.

Now change one fact. Suppose Arjun had already received Rs 9,00,000 of exempt gratuity from a previous employer five years earlier. His remaining lifetime headroom is Rs 20,00,000 minus Rs 9,00,000, which is Rs 11,00,000. The exempt figure is now the least of: Rs 13,00,000 actual, Rs 11,00,000 remaining ceiling, and Rs 13,15,385 formula. The lowest is the Rs 11,00,000 remaining ceiling. So Rs 11,00,000 is exempt and the balance, Rs 2,00,000, is taxable as salary at his slab rate on the departure-year return. The earlier payout quietly ate into his shelter, and the same Rs 13,00,000 that would have been fully tax-free becomes partly taxable. This is the lifetime-cap trap in a single number.

Leave encashment: Section 10(10AA) and the Rs 25,00,000 ceiling

The second big exit payment is the cash you get for accumulated, unused leave. Many employers let you carry leave forward year after year, and on exit they pay out the cash equivalent of the balance. The tax treatment of that payout depends sharply on when you encash.

The first rule is the one people get wrong before they even reach the exemption: leave encashed while you are still in service, mid-career, is fully taxable as salary, with no exemption at all (a resident can claim relief under Section 89, but the receipt itself is taxable). The Section 10(10AA) exemption is reserved for leave encashment received on retirement or otherwise on leaving the job. The phrase in the section is "retirement whether on superannuation or otherwise", and the "or otherwise" is what brings resignation within scope. So a resignation to move abroad qualifies for the exemption; an in-service encashment to fund a holiday does not.

Again the treatment splits by employer type.

Government employees get leave encashment on retirement or resignation that is fully exempt under Section 10(10AA)(i), no ceiling.

Non-government employees get a capped exemption under Section 10(10AA)(ii), and the ceiling is the headline number that changed recently: Rs 25,00,000. For years the cap sat at a stale Rs 3,00,000, set back in 2002. CBDT Notification 31/2023, dated May 24, 2023, raised it to Rs 25,00,000 with effect from April 1, 2023, in line with the rise in government salaries. So for anyone leaving an Indian job in FY 2025-26, the live ceiling is Rs 25,00,000, and the old Rs 3,00,000 figure that still appears in older articles is obsolete.

The exemption is the least of four figures:

1. The actual leave encashment received.
2. Rs 25,00,000 (the lifetime statutory ceiling).
3. Ten months' average salary, based on the average of the last ten months immediately before leaving.
4. The cash equivalent of unavailed leave, capped at thirty days of leave for each completed year of service, even if your employer's policy allowed you to accumulate more.

Salary here means basic plus dearness allowance (to the extent DA forms part of retirement benefits) plus any commission computed as a fixed percentage of turnover. The thirty-day-per-year cap in the fourth limb is a frequent trap: if your company let you bank 45 days a year, the Income Tax Act still only recognises 30 days a year for the exemption, so the cash equivalent is computed on the lower figure.

As with gratuity, the Rs 25,00,000 ceiling is a lifetime aggregate across all employers. If you received exempt leave encashment from a previous employer, it counts against the same Rs 25,00,000 pool, and only the remaining headroom shelters the new payout. Anything above the exempt figure is taxable as salary in the year of receipt.

Worked example: leave encashment exemption on exit

Continue with Arjun. On exit he also receives leave encashment. His average monthly salary (basic plus DA) over the last ten months is Rs 1,15,000. He has 18 completed years of service for this purpose, and his employer pays out the cash equivalent of 300 days of accumulated leave at Rs 9,20,000. He has never encashed leave on exit before, so his full Rs 25,00,000 ceiling is intact.

Work the four figures:

1. Actual leave encashment received: Rs 9,20,000.
2. Statutory ceiling: Rs 25,00,000.
3. Ten months' average salary: Rs 1,15,000 times 10 equals Rs 11,50,000.
4. Cash equivalent of unavailed leave, capped at 30 days per completed year: 30 days times 18 years equals 540 days available under the cap, but he only has 300 days, so the lower of the two applies. 300 days at a daily rate of Rs 1,15,000 divided by 30, which is Rs 3,833 per day, gives 300 times Rs 3,833 equals Rs 11,50,000 (equivalently, 300/30 equals 10 months of salary).

The exempt amount is the least of the four, which is the actual leave encashment of Rs 9,20,000. So Arjun's entire leave encashment is exempt, and nothing is taxable, because the actual amount received is lower than every cap and formula figure.

Now stress the example. Suppose Arjun's payout had instead been Rs 14,00,000 (a higher daily rate or more accumulated days within the cap), with the ten-months figure and the 30-day-per-year figure both working out higher than that, and his full Rs 25,00,000 ceiling intact. The exempt amount would be the least of Rs 14,00,000 actual, Rs 25,00,000 ceiling, Rs 11,50,000 ten-month salary, and the leave-cap figure. If the ten-month figure of Rs 11,50,000 is the lowest, then Rs 11,50,000 is exempt and the balance, Rs 2,50,000, is taxable as salary. The ten-months-salary limb is the one that most often bites for people with high pay and large accumulated balances, because it caps the exemption well below both the statutory Rs 25,00,000 and the actual payout.

Commuted pension: Section 10(10A)

If your Indian employer's scheme gives you the option to take part of your pension as a one-time lump sum instead of higher monthly payments, that act is commutation, and the lump sum is the commuted pension. Its exemption lives in Section 10(10A), and the treatment again turns on employer type.

For a government employee, the commuted pension is fully exempt under Section 10(10A)(i), the whole lump sum tax-free, with no cap.

For a non-government employee, the commuted pension is partly exempt under Section 10(10A)(ii):

• If you also received gratuity, one-third of the full commuted value is exempt.
• If you did not receive gratuity, one-half of the full commuted value is exempt.

The balance is taxed as salary in the year of receipt. The "full commuted value" means the total lump sum that the commuted fraction represents, grossed up to 100 percent, not just the portion you took.

The arithmetic is easiest on a number. Say your full commuted pension value is Rs 24,00,000 and you received gratuity. One-third, Rs 8,00,000, is exempt; the remaining Rs 16,00,000 is taxed as salary. Had you not received gratuity, one-half, Rs 12,00,000, would be exempt, and only Rs 12,00,000 taxed. The deeper mechanics of pension commutation, and how a commuted pension interacts with the DTAA once you are abroad, are in NRI pension taxation.

Most people leaving a private job in their thirties or forties to move abroad will not be commuting a pension on the way out, because they are nowhere near retirement. But anyone leaving a long-service role with a defined-benefit or superannuation scheme that offers commutation should run this calculation, because the one-third or one-half exemption is generous and easy to leave on the table.

Uncommuted pension: taxed as salary, full stop

The flip side of commutation is the uncommuted pension, the regular monthly payment you draw from a pension scheme. There is no special exemption for it. An uncommuted pension is fully taxable as salary at slab rates, with the standard deduction under Section 16(ia) available, just as it is for any salaried person, Rs 75,000 under the new regime for FY 2025-26.

If you leave an Indian job and a pension starts paying you a monthly amount later, that pension is Indian-source income, taxable in India whatever your residential status. Once you are an NRI, the DTAA pension article (often Article 18, Article 20 in the India-US treaty) may give the primary or sole taxing right to your country of residence for a private or occupational pension, which you assert with a Tax Residency Certificate and an electronically filed Form 10F. A government-service pension stays with India under the government-service article regardless. The full country-by-country treatment is in NRI pension taxation and the treaty machinery is in DTAA mechanics: TRC and Form 10F.

Putting the exit settlement together: a combined worked example

Stack Arjun's numbers into one final-settlement picture for FY 2025-26, the year he leaves in October 2025. Assume he is a resident for that year, having spent more than 182 days in India before leaving, and has full lifetime headroom on both caps.

• Gratuity received: Rs 13,00,000. Exempt under Section 10(10): the least of Rs 13,00,000, Rs 20,00,000, and the Rs 13,15,385 formula, which is Rs 13,00,000. Taxable gratuity: nil.
• Leave encashment received: Rs 9,20,000. Exempt under Section 10(10AA): the least of Rs 9,20,000, Rs 25,00,000, Rs 11,50,000, and the leave-cap figure, which is Rs 9,20,000. Taxable leave encashment: nil.
• Salary for the year (April to October): Rs 8,40,000, taxable as ordinary salary, less the Rs 75,000 standard deduction.
• EPF withdrawal, if he takes it, is exempt under Section 10(12) because he has more than five years of continuous service; the EPF treatment and the TDS trap on it are covered in NRI pension taxation.

So in the clean case, the entire gratuity and the entire leave encashment pass through exempt, and Arjun's Indian taxable income for the departure year is essentially his Rs 8,40,000 salary less the Rs 75,000 standard deduction, plus whatever foreign salary the resident-year rule pulls in after he lands in Dubai, with DTAA relief on the overlap. The exit lump sums, the part everyone worries about, end up tax-free precisely because each one came in under its cap and its formula. Change the gratuity to exceed the remaining lifetime headroom, or push the leave encashment above the ten-months-salary limb, and the excess flows into that same resident return as taxable salary. That is the whole shape of it: exempt up to the ceiling, taxed above it, all on the resident return for the year you leave.

Edge cases

Multiple employers and the lifetime cap. Both the Rs 20,00,000 gratuity ceiling and the Rs 25,00,000 leave-encashment ceiling are lifetime aggregates across every employer you have ever had, not per-job allowances. If you collected exempt gratuity or leave encashment at an earlier exit, that amount has already consumed part of the lifetime pool, and only the remainder shelters your current payout. Senior professionals who have changed jobs several times are the most exposed, because they have often used up headroom they have forgotten about, exactly when the final, largest payout arrives. Before you assume a payout is fully exempt, tally what you have already claimed across your career.

Government versus private. The split runs through all three sections. A government employee gets gratuity, leave encashment and commuted pension fully exempt with no ceiling. A non-government employee is capped: Rs 20,00,000 on gratuity, Rs 25,00,000 on leave encashment, one-third or one-half on commuted pension. Public-sector undertakings and nationalised banks are generally treated as non-government for this purpose, despite the government ownership, so a PSU employee gets the capped private-sector treatment, not the unlimited government exemption. Do not assume that working for a government-owned entity gives you the unlimited exemption; the test is the nature of the employer in the section, and PSUs sit on the capped side.

Pension paid abroad under the DTAA. A monthly pension that starts paying after you have emigrated is Indian-source income, taxable in India whatever your status. But once you are an NRI, the DTAA pension article may reserve the primary or sole taxing right to your country of residence for a private or occupational pension, which you claim with a TRC and a Form 10F so the Indian payer withholds at the treaty position. A government-service pension stays taxable only in India under the government-service article (often Article 19), regardless of where you live, unless the resident-and-national carve-out applies. So the lump-sum commutation you take on the way out follows Section 10(10A) on the departure-year resident return, while the monthly stream that follows you abroad is governed by the treaty. Keep the two apart. The detail is in NRI pension taxation and DTAA relief for NRIs.

TDS on the exit payment. Your employer will deduct TDS under Section 192 on the taxable portion of these payments, treating them as salary. If the exempt fractions are applied correctly in your final payslip, TDS is deducted only on the genuinely taxable balance. If the employer over-deducts, for instance by ignoring a formula limb or misapplying a cap, the TDS is a prepayment you recover by filing your return. The recovery mechanics, which matter because you may be abroad by the time you file, are in TDS for NRIs and refunds.

The Section 87A rebate is for residents only. In the departure year you are usually still a resident, so if your total taxable income after the exemptions is low enough, the Section 87A rebate can reduce your tax to nil, the same as any resident. But from the following year, as an NRI, you lose the 87A rebate entirely and pay slab tax from the first rupee above the basic exemption. This is one of the few areas where being a resident in the departure year actually helps you.

Encashing leave while still employed. If you encash leave mid-career rather than on exit, that receipt is fully taxable as salary with no Section 10(10AA) exemption; only the exit payout carries the shelter. People who cash out leave in their final working months, before formally resigning, can inadvertently turn an otherwise-exempt payout into taxable salary. Time the encashment to the exit, not before.

The closing read

The honest framing is this: the lump sums you collect on the way out of an Indian job are mostly exempt, but only up to a ceiling, and the ceiling is a lifetime one. Gratuity is sheltered up to Rs 20,00,000 under Section 10(10), leave encashment up to Rs 25,00,000 under Section 10(10AA), and a commuted pension by the one-third or one-half rule under Section 10(10A). For a long-service employee with a single employer and no prior payouts, the formulas usually swallow the whole amount and nothing is taxable. The trouble starts when the lifetime cap has already been partly used at an earlier job, or when the ten-months-salary limb on leave encashment, or the formula limb on gratuity, comes in below the actual payout. Then the excess is taxed as salary, and it is taxed on the resident return for the year you leave, because in that year you are almost always still a resident of India.

So commit to three things before you board the flight. First, tally your lifetime gratuity and leave-encashment exemptions already claimed across every prior employer, because the caps do not reset and the largest payout of your career is exactly where the forgotten headroom catches you. Second, run all four limbs on leave encashment and all three on gratuity, rather than assuming the statutory ceiling is the binding figure; for high earners the salary-based limbs usually bite first. Third, treat the departure year as a resident year unless you have genuinely spent fewer than 182 days in India, and file that resident return properly with the exemptions applied, the standard deduction claimed, and any over-deducted TDS recovered. The monthly pension that follows you abroad is a separate, later question, governed by the treaty, and you handle it under the DTAA pension article once you are an NRI.

The exception, as always, is the government employee, for whom all three exemptions are unlimited and the whole exit settlement is tax-free. For everyone in the private sector and the PSUs, the caps are real, the lifetime aggregation is real, and the salary-based limbs are where the tax actually lands. Do the arithmetic before you assume the cheque is clean.

Related guides

• NRI ITR filing for AY 2026-27
• NRI residency and RNOR rules
• NRI pension taxation
• DTAA relief for NRIs
• DTAA mechanics: TRC and Form 10F
• TDS for NRIs and refunds
• RSU and ESOP taxation for NRIs
• Foreign tax credit and Form 67
• Moving abroad financial checklist
• Convert resident account to NRO
• NRE, NRO and FCNR accounts
• Retirement planning across two countries
• All Taxation guides
• All Jobs guides

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This guide is general information, not tax advice. The taxation of gratuity, leave encashment and pension lump sums depends on your employer type, your length of service, your salary composition, the exemptions you have already claimed across earlier employers, and your residential status in the year you leave. Rates, sections and provisions cited are for AY 2026-27 (FY 2025-26 income, governed by the Income Tax Act 1961); the Income Tax Act 2025 renumbers several of these sections from April 1, 2026, with the exemption amounts carried across unchanged. The Rs 20,00,000 gratuity ceiling applies to retirements or exits on or after March 29, 2018, and the Rs 25,00,000 leave-encashment ceiling was notified by CBDT Notification 31/2023 with effect from April 1, 2023. Confirm your position with a qualified chartered accountant or cross-border tax adviser before filing or relying on any exemption.