The four payouts in a final settlement, and why each is taxed on its own
When you resign from an Indian employer to move abroad, your full-and-final settlement usually bundles together several distinct payments. They look like one number on the statement, but the tax department treats each separately, and lumping them together is how people overpay or get a notice.
Gratuity rewards your length of service and is exempt up to a limit under Section 10(10). Leave encashment : payment for unused leave, has its own, separate exemption with its own cap. A superannuation fund payout, where your employer ran one, is taxed according to the type of fund and how you take the benefit. And your EPF (provident fund) balance is a fourth, separate item with its own five-year rule.
| Payout | How it's taxed | Exemption |
|---|---|---|
| Gratuity | Salary, above the exempt limit | Section 10(10), capped |
| Leave encashment | Salary, above the exempt limit | Separate cap |
| EPF balance | Broadly tax-free after 5 years' service | See our EPF service |
Because each has a different exemption and a different trigger, the right approach is to compute them one by one, not as a single retirement blob. The next sections take gratuity, leave encashment and superannuation in turn; the EPF balance is handled in our dedicated EPF coordination service, which is the cleaner place for it.
Gratuity: exempt up to a limit, taxable above it
Gratuity is the lump sum an employer pays for long service, and Section 10(10) makes part of it exempt from tax. The exemption is not a flat figure: it is the least of a few prescribed amounts : broadly, the actual gratuity received, a figure based on your salary and years of service, and an overall ceiling that the law sets. Whatever is left above the exempt portion is taxable as salary.
The practical points that decide your number are your years of service, the salary used in the formula, and whether your employer is covered by the Payment of Gratuity Act, which changes how the formula reads. The overall ceiling is a fixed cap that has been revised upward over the years; because it changes, the exempt figure is worked out against the limit in force when you receive the gratuity rather than a remembered number.
For someone leaving to work abroad, the timing matters: the gratuity is taxed in the year of receipt against your residential status for that year, and that year is often a part-resident one. So the exemption is computed first, and then what remains taxable is placed correctly in the year the settlement falls.
Leave encashment, superannuation, and the EPF you shouldn't forget
Leave encashment : being paid out for leave you never took, is taxed as salary, but it carries its own exemption on retirement or resignation (Section 10(10AA)), separate from gratuity and with its own cap. As with gratuity, the exempt amount is the least of a set of prescribed figures, and the balance is taxable. It is a common mistake to assume the gratuity exemption covers it too; it does not.
A superannuation fund payout depends on the fund. Where the employer ran an approved superannuation fund, how the benefit is taxed turns on whether it is commuted to a lump sum or taken as a pension, and the rules differ accordingly. Because the treatment is fund-specific, it is read off your fund's terms rather than generalised.
The fourth piece is your EPF / provident fund balance, and it has its own logic: it is broadly tax-free once you've completed five years of continuous service (with UAN transfers across employers counting toward that), and taxable in parts if you withdraw earlier. The settlement is claimed on Form 19 (final PF) with Form 10C (EPS), and any TDS runs under Section 192A. The EPF settlement also involves UAN, PAN status and the withdrawal mechanics, which is why we handle it through a dedicated service, see /services/nri-epf-withdrawal, rather than folding it into this page. Treat it as the fourth payout to line up, not an afterthought.
A worked example: a settlement in the year of the move
Arjun resigns from a Mumbai employer after eleven years to join a firm in Singapore. His full-and-final settlement has four parts: gratuity for his service, encashment of unused leave, a superannuation lump sum, and his EPF balance.
His CA takes them one at a time. The gratuity is run through the Section 10(10) computation. The least of the prescribed amounts, so a large part is exempt and only the excess is taxed as salary. The leave encashment is computed under its own separate exemption, not assumed to be covered by the gratuity relief, with its balance taxable. The superannuation payout is read against the fund's terms to see how the lump sum is treated. The EPF balance, because Arjun has over five years of continuous service (his UAN tying his employers together), is broadly tax-free, and that piece is run through the EPF coordination service rather than this one.
The year Arjun moves is a part-resident year, so once each exemption is applied, the taxable remainder is placed in that year against his residential status. The result is a single, correct settlement-year position instead of four payouts taxed by guesswork.