Leave Encashment and It’s Taxability

Section 10 (10AA)

The term "leave encashment" refers to compensation or payment made in return for unused leaves. Generally, employees are allowed to take leave during the period of service. Employee may avail such leave or in case the leave is not availed, then the leave may either lapse or be accumulated for future or allowed to be enchased every year or at the time termination/ retirement. The payment received on account of encashment of unveiled leave would form part of salary.

However, section 10(10AA) provides exemption in respect of amount received by way of encashment of unutilized earned leave by an employee at the time of his retirement.

Taxability Section 10 (10AA)

For Government employees

Leave Encashment received at the time of retirement is fully exempt.

For Non-government employees

Leave salary received at the time of retirement is exempt from tax to the extent of least of the following:

3,00,000
Leave salary actually received
10 months’ salary (on the basis of average salary of last 10 months)
Cash equivalent of leave (based on last 10 months’ average salary immediately preceding the date of retirement) to the credit of the employee at the time of retirement or death. Earned leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has.

Leave salary received during the period of service is fully Exempt

Note

Where leave salary is received from two or more employers in the same previous year, then the aggregate amount of leave salary exempt from tax cannot exceed 3,00,000.
Where leave salary is received in any earlier previous year from a former employer and again received from another employer in a later previous year, the limit of 3,00,000 will be reduced by the amount of leave salary exempt.
Salary for this purpose means basic salary and dearness allowance, if provided in the terms of employment for retirement benefits and commission which is expressed as a fixed percentage of salary.
‘Average salary’ will be determined on the basis of the salary drawn during the period of ten months immediately preceding the date of his retirement whether on super annuation or

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CHETNAA GOYAL

Chetnaa Goyal one of the co-founder of TaxSmooth. An Qualified Chartered Accountant. More than 12 years of Experience in Direct Taxation. having own Taxation Practice in Delhi. Expertise in Income Tax Cases, Return filing, Tax Planning, Tax Advisory etc.