Direct and Indirect Taxation · Income which does not form part of Total Income

Exempt Receipts of Individuals and HUF

Updated 10 October 2026 · Fact-checked

Exempt receipts of individuals and HUF are personal receipts left out of total income, such as a member's share of HUF income, scholarships, gratuity, leave encashment, VRS payment and retrenchment compensation. To solve, identify the receipt, check who paid it and the employer type, apply the least-of rule, and add only the excess to taxable income.

Understand Exempt Receipts of Individuals and HUF

Some money you receive is not taxed at all. The law either excludes it from total income or allows a deduction that wipes it out. For an individual or HUF, the common cases are personal receipts: a member's share in HUF income, scholarships to meet the cost of education, and retirement-time payments from an employer.

The retirement-time payments are tested most. Under the Income-tax Act, 2025, section 19 lists them in a Table of deductions from salaries. Each item has a nature of sum and a limit. Some are fully free (entire amount). Others are free only up to the least of several figures. The excess over the limit stays taxable as salary.

A member's share in the income of the HUF is exempt in the member's hands. The HUF has already been taxed on that income as a separate person, so the member is not taxed again. Exempt scholarships work the same way: the exemption is for money received to meet the cost of education.

The key skill is to match each receipt to its category. Gratuity depends on whether the employee is covered by the Payment of Gratuity Act, 1972, or is a government employee. Leave encashment depends on whether the employer is the Central or a State Government. Pension commutation depends on whether gratuity was also received. Always read the facts for these clues.

Finally, remember that the exemption is applied on the amount actually received. Compute the limit, compare it with the receipt, and tax only the balance. Where a question gives a notified limit, use it; where it does not, state your assumption clearly.

Key rules to remember

Gratuity: Government death-cum-retirement gratuity and defence services retiring gratuity: Exempt = Entire amount; Applies to death-cum-retirement gratuity under the specified Central, All-India, State or local authority pension rules, and retiring gratuity under defence services pension rules.
Gratuity under the Payment of Gratuity Act, 1972: Exempt = Amount received, restricted to the amount calculated under section 4(2) and (3) of that Act; For employees covered by that Act.
Any other gratuity (on retirement, incapacity before retirement, or termination): Exempt = Least of (a) actual gratuity; (b) amount notified by the Central Government; (c) ½ × A × B; Limb (c) is worded in the Act as half month's salary for each completed year of service, so (c) = ½ × A × B. A = average salary of the ten months immediately preceding the month of the event; B = completed years of service. 'Salary' includes dearness allowance only if the terms of employment so provide, and excludes all other allowances and perquisites.
Aggregate cap on gratuity: Deduction ≤ A − B; A = limit notified by the Central Government; B = gratuity received in earlier tax years and already allowed as exempt. Applies where gratuity comes from one or more employers.
Leave encashment on retirement: Central or State Government employee: Exempt = Entire amount; Cash equivalent of earned leave at credit at retirement, whether on superannuation or otherwise.
Leave encashment on retirement: other employees: Exempt = Least of (a) cash equivalent of earned leave at credit (entitlement not above 30 days for every year of actual service); (b) 10 × average monthly salary of the preceding ten months; (c) amount notified by the Central Government; (d) actual payment received; Salary includes DA only if the terms of employment so provide. The A − B aggregate cap also applies across employers and tax years.
Retrenchment compensation to a workman: Exempt = Least of (a) compensation received; (b) amount under section 25F(b) of the Industrial Disputes Act, 1947; (c) notified amount, not less than ₹50,000; Compensation on closure of the undertaking, or on transfer in the specified cases, is deemed retrenchment compensation. Compensation under an approved scheme is exempt in full.
Voluntary retirement or termination under a scheme: Exempt = Lower of compensation received and ₹5,00,000; Only for the listed types of employers. Once allowed in a tax year, no VRS deduction is allowed in any other tax year. No deduction if relief under section 157 was allowed for the same amount.
Commutation of pension: Government and similar schemes, or from a Schedule VII fund: entire amount. Other employers: with gratuity, commuted value of one-third of pension; without gratuity, commuted value of one-half of pension; Commuted value takes account of age, health, interest rate and recognised mortality tables.
Standard deduction (for contrast): ₹75,000 or salary, whichever is less, where tax is computed under section 202(1); otherwise ₹50,000 or salary, whichever is less; This is a deduction from salary, not an exempt receipt, but it appears in the same Table.
Share of income from HUF: Member's share in HUF income = Exempt; Exempt in the hands of the member. The HUF itself is assessed on its income.

How to solve Exempt Receipts of Individuals and HUF questions

Use this method for any question on exempt personal receipts. It keeps you from missing a condition and shows the examiner every step.

1List every receipt in the question. Ignore amounts that are clearly salary or other income for now.
2For each receipt, name its category: gratuity, leave encashment, retrenchment compensation, VRS, commutation, HUF share or scholarship.
3Read the facts for the deciding clue: government or non-government employer, covered by the Payment of Gratuity Act or not, gratuity also received or not, workman or not.
4Write the rule for that category. For 'least of' items, list each limb separately.
5Compute each limb. For gratuity and leave, work out salary as basic plus DA (only if the terms so provide) and nothing else. Use completed years only.
6Take the least figure. Compare it with the amount received. Exempt = the lower of the limit and the receipt.
7Taxable portion = amount received − exempt amount. Carry it to salary income. Show the exempt amount separately.
8Check the conditions: earlier exemptions used (A − B cap), one-time VRS rule, and any assumption you made about a notified limit.

Quickest way: Least-of table in the margin

When to use it: Use this for MCQs and for the exempt-receipts part of a long salary computation when time is short.

Draw a two-column table: receipt and exempt amount.
Government employee gets full exemption for gratuity and leave encashment. Say 'entire' and move on.
For other gratuity, write three limbs: actual, notified limit, and ½ × average salary × completed years. Circle the smallest.
For leave encashment, write four limbs: leave cash value, 10 × average monthly salary, notified limit, actual. Circle the smallest.
For VRS, write the lower of the amount and ₹5,00,000.
Subtract exempt from received and write the taxable excess. Do this last so it is not skipped.

Common mistakes in Exempt Receipts of Individuals and HUF

Using last drawn salary or including all allowances in the gratuity formula.
Students remember 'salary' as total pay.
Fix: Use average salary of the ten months before the event. Under section 19(2)(b), salary is basic plus dearness allowance, and DA counts only if the terms of employment so provide. All other allowances and perquisites are excluded. If a question mentions commission or bonus, follow the facts and instructions given.
Counting part years in completed years of service.
Students round up 20 years 8 months to 21.
Fix: B is the number of completed years. Drop the extra months.
Giving full exemption on leave encashment to a private-sector employee.
The government rule (entire amount) is remembered for everyone.
Fix: Check the employer first. Only Central and State Government employees get the full amount. Others get the least of four limbs.
Allowing VRS exemption in a second year, or above ₹5,00,000.
Students treat the limit as annual.
Fix: The deduction is the lower of compensation and ₹5,00,000 and cannot be allowed for any other tax year once given. Also confirm that the employer is of a listed type.
Forgetting to tax the excess over the exempt limit.
Students stop after finding the exempt figure.
Fix: Always write: taxable = received − exempt, and carry it to salary income.
Taxing a member's share of HUF income.
It looks like money received from someone else, so it seems like income.
Fix: The share in HUF income is exempt in the member's hands. Taxability of the HUF's own income is a separate step.

Worked examples

Example 1

Mr. Rohit Sharma retires from a private company in Pune after 20 years 8 months of service. His employer is not covered by the Payment of Gratuity Act, 1972. His average salary for the ten months before retirement is ₹50,000 per month (basic plus DA, and the terms of employment include DA in salary). He also received other allowances, which are not part of this figure. He receives gratuity of ₹6,00,000. Assume the notified limit is higher than ₹6,00,000. Find the exempt and taxable gratuity.

Show the solution

Category: other gratuity on retirement. Rule: least of actual, notified limit, and half month's salary for each completed year of service, that is ½ × A × B.
Completed years B = 20. Part year of 8 months is ignored.
A = ₹50,000 (basic plus DA; other allowances are excluded). Limb (c) = ½ × 50,000 × 20 = ₹5,00,000.
Limb (a) actual = ₹6,00,000. Limb (b) notified limit is assumed to be higher than ₹6,00,000.
Least of the three = ₹5,00,000. This is exempt.
Taxable gratuity = 6,00,000 − 5,00,000 = ₹1,00,000.

Answer: Exempt gratuity ₹5,00,000; taxable gratuity ₹1,00,000, included in salary income.

Example 2

Ms. Kavita Nair retires from a private company after 25 years. She receives ₹4,80,000 as cash equivalent of earned leave at her credit, which is within 30 days for every year of actual service. Her average monthly salary for the ten months before retirement is ₹45,000. Assume the notified limit is higher than ₹4,80,000. Find the exempt and taxable leave encashment.

Show the solution

Category: leave encashment on retirement, non-government employee. Rule: least of four limbs.
Limb (a): this is the lower of (i) the cash equivalent of earned leave at her credit and (ii) the cash value of the entitlement capped at 30 days for every year of actual service (25 years). The question says her leave at credit is within that cap, so the lower figure is the cash equivalent of leave at credit = ₹4,80,000.
Limb (b): 10 × average monthly salary = 10 × 45,000 = ₹4,50,000.
Limb (c): notified limit, assumed to be higher than ₹4,80,000.
Limb (d): actual payment received = ₹4,80,000.
Least of the four limbs = ₹4,50,000. This is exempt.
Taxable leave encashment = 4,80,000 − 4,50,000 = ₹30,000.

Answer: Exempt leave encashment ₹4,50,000; taxable ₹30,000, included in salary income.

Exam tips

MCQs often hide the deciding clue in one phrase: 'government employee', 'covered by the Payment of Gratuity Act', 'workman', or 'also received gratuity'. Underline it before computing.
In long answers, show every limb of the 'least of' rule separately. Step marks go to each limb even if the final answer slips.
If the question does not give the notified limit, state your assumption in one line instead of guessing a figure silently.
Check for earlier exemptions in the question. The A − B cap on gratuity and leave encashment can reduce the limit.
Show the exempt amount and the taxable excess as two separate lines so the examiner can see both.

Practice questions from Income which does not form part of Total Income

Exempt Receipts of Individuals and HUF: frequently asked questions

Is gratuity fully exempt for every employee?

No. Government employees receiving death-cum-retirement gratuity get the entire amount exempt. For employees under the Payment of Gratuity Act, 1972, the exemption is limited to the amount worked out under section 4(2) and (3) of that Act. For others, it is the least of three limbs.

Is leave encashment during service exempt?

The leave salary entries in the Table in section 19 cover only the cash equivalent of leave salary received at retirement, whether on superannuation or otherwise. The text does not give a rule for encashment received during service. Do not apply the retirement limits to it, and follow the facts and instructions given in the question.

Is the member's share of HUF income taxable?

No. A member's share in the income of the HUF is exempt in the member's hands. The income is dealt with in the HUF's own computation.

Can I claim VRS exemption again if I take another scheme later?

No. Once the deduction is allowed for any tax year, it cannot be allowed for any other tax year. The limit is the lower of the compensation received and ₹5,00,000.

What counts as salary in the gratuity and leave formulas?

Salary includes dearness allowance only if the terms of employment so provide. It excludes all other allowances and perquisites. Use the average of the ten months immediately before the event.