Leave Encashment
Leave encashment is the amount of money which is received in exchange of period of leave NOT availed by the employee.
There are many types of leaves in an organisation such as:
-Privilege leave/Earned leave/ Annual leave
-Loss of pay leave
-Bereavement leave
-Maternity leave
-Sick leave
-Casual leave
-Paternity leave
-Compensatory leave
-Marriage leave
Generally, other than Earned leave all other leaves are lapsed within the same year if not availed. However, earned leaves are carried forward.
Leaves which are earned for additional days worked are called Earned leaves. These types of leaves can be used for vacation or to enjoy festivals which are not declared as holidays etc. Moreover, as per labour laws providing earned leaves are mandatory in every organisation. Earned leave can also be converted into cash through a process called Leave Encashment. Generally, earned leaves are encashed by the employees.
But money earned through encashing earned leaves is subject to tax. However, exemption is also provided in respect of leave encashment in Income Tax Act,1961.
Taxable Amount of Leave Encashment
Entire amount received by an employee as leave Encashment is taxable under Income Tax Act,1961.
Exemption under Leave Encashment [section10(10AA)]
1. If the Leave encashment received during the employment then it is FULLY TAXABLE for all kind of employees whether government employees or other employees.
2. Leave encashment received on resignation by or retirement of a government employee then it is FULLY EXEMPT for tax purposes.
3. Leave encashment received by an employee, other than a government employee, on resignation or retirement, the exemption will be least of following:
- Leave encashment actually received
- Rs.3,00,000
- Ten months’ salary on the basis of average salary of last 10 months preceding retirement
- Cash equivalent of unavailed leave based on last 10 months’ average salary to his credit at the time of retirement.(Earned leave cannot exceed 30 days for every year of actual service)
For example:
Mr. Ramesh (non-government employee) retired on 1.12.2021 after 20 years of service and received leave salary of 5,00,000. Other details of his salary income are:
Basic Salary: 5,000 p.m. (1,000 was increased w.e.f. 1.4.2021)
Leave availed during service: 480 days
He was entitled to 30 days leave every year. You are required to compute his exemption against receipt of leave encashment.
ANSWER
Exemption under Leave Encashment will be least of following:
1. Leave encashment received = 5,00,000
2. Threshold limit = 3,00,000
3. Ten months’ salary on the basis of average salary of last 10 months preceding retirement
= 10*salary of last 10 months/10
= 10*48000/10
= 48000
4. Cash equivalent of unavailed leave based on last 10 months average salary to his credit at the time of retirement
= average salary*leave due/30
= 4800*120/30
= 19200
*leave due = leave allowed – leave availed
= 600 – 480
= 120 days
HENCE, Exemption under Leave Encashment will be Rs.19,200.
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