Leave encashment and gratuity on death of employee

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Query on taxability of gratuity and leave encashment received by legal heirs of a deceased private sector employee. Expert clarified that such payments are generally exempt in the hands of legal heirs, with gratuity exempt up to statutory limits and leave encashment fully exempt as per CBDT circulars.

Lakshay Gogia

Lakshay Gogia (Querist)
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22 January 2026 Dear Sir
Is the gratuity and leave encashment received on death of employee in private sector is 100% exempt or upto the specified limits. For leave encashment, is still the letter no. 573 of 1965 still applicable.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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22 January 2026 Yes, Under CBDT Circular No. 573 (dated August 21, 1990), a lump sum gratuity paid voluntarily to the widow or legal heirs of an employee who dies while in active service is not taxable under the Income Tax Act.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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22 January 2026 For legal heirs of a deceased private sector employee, leave encashment is 100% exempt from income tax.
The amount received by the legal heir or nominee is not considered "salary" or taxable income. This complete exemption is supported by CBDT Circular No. 309 (dated July 3, 1981), which clarifies that such payments are in the nature of ex-gratia and are not taxable in the hands of the legal heirs.

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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22 January 2026 While gratuity received by legal heirs is exempt up to the specified statutory limits.
Standard Exemption Limits:
Employees covered under the Gratuity Act: Exempt up to ₹20 lakh (or the amount calculated by the 15/26 formula, whichever is lower).
Employees NOT covered under the Act: Exempt up to ₹10 lakh.

Lakshay Gogia

Lakshay Gogia (Querist)
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22 January 2026 Thanks a ton sir.. is letter no. 35/1/65-IT(B) of 1965 issued by CBDT still in force.?

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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22 January 2026 Yes, the Central Board of Direct Taxes (CBDT) Letter No. 35/1/65-IT(B), dated November 5, 1965, is still considered to be in force and is widely cited in Indian tax law and practice. It clarifies that leave salary/encashment paid to the legal heir of a deceased employee is not taxable as salary in the hands of the recipient.
This position was further supported by Circular No. 309 on July 3, 1981, which confirmed that the cash equivalent of leave salary received by the family of a deceased government employee is also not subject to income-tax.

Lakshay Gogia

Lakshay Gogia (Querist)
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22 January 2026 Thanks for the valuable information sir!

Dhirajlal Rambhia

Dhirajlal Rambhia (Expert)
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22 January 2026 You are welcome.

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