Leave encashment and gratuity on death of employee
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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.
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.
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.
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.
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.
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.
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.
22 January 2026
Thanks a ton sir.. is letter no. 35/1/65-IT(B) of 1965 issued by CBDT still in force.?
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.
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.
22 January 2026
Thanks for the valuable information sir!
22 January 2026
You are welcome.
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