Taxability of encashment of earned Leave

Leave encashment is the amount paid for the employee’s leave period, depending upon the leaves to his credit and his salary at the time of termination of employment or at the time of encashing his leaves. The employee receives leave encashment during his employment period or at the time of retirement. Taxability of encashment of leave received during employment Encashment of Leave at any time during the employment is Taxable in full. However, benefit of relief u/s 89 can be claimed by assessee, under the expression “Salary”. Further, Leave encashment paid by the employer during the currency of the contract of employment is not exempt u/s 10(10AA), since the word otherwise used in Sec.10 (10AA) along with the words “at the time of his retirement or on superannuation” would cover only cases where there is severance of employer-employee relationship. Taxability of encashment of leave received at the time of retirement  taxability For the purpose of Exemption of accumulated Leave Encashment, employees are divided into two categories: (i)Government Employees (Central and State Government only): Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by a Government employee, is fully exempt from tax. (ii) Other Employees: Leave encashment of accumulated leave at the time of retirement , whether on superannuation or otherwise, received by other employees (including employees of Local Authorities and PSU) is exempt to the extent of the minimum of the following amounts:

  • Rs. 3,00,000/-
  • Ten months’ average salary;
  • Cash equivalent of unavailed leave calculated on the basis of average salary of maximum 30 days leave for every year of actual services rendered to the employer from whose service he has retired.
  • Leave encashment actually received at the time of retirement.

Highlights:

  • If the employee had received leave encashment in any one or more earlier previous year(s) also and had availed of the exemption in respect of such amount, than the limit given i.e. Rs 300000/-, shall be reduced by the amount of exemption(s) availed earlier.
  • The exemption of Leave Encashment can also be claimed in case of resignation by an employee. Section 10(10AA) applies equally to a case of Voluntary Retirement on account of resignation.
  • Leave salary received by the family of a government servant, who died in harness, is not taxable in the hands of the recipients.
  • Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is an ex-gratia payment on compassionate grounds in the nature of gifts. Thus the payment is not in the nature of salary.

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2 thoughts on “Taxability of encashment of earned Leave”

  1. Dear Rajkumar,
    Leave encashment limit specified by the Government is Rs. 3,00,000/-.

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