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Introduction –

During the service tenure, you are allowed various types of leaves e.g. Sick leave, Casual Leave, Earned Leave, etc. Sick leave and casual leaves cannot be carried forward to next years. Earned leaves can be accumulated and carried forward to next years.

Some time the employees can not avail all these earned leaves which were allowed to him. He may encash these leaves and earn salary for the number of days which were allowed to be taken as leaves. The number of leaves allowed to be taken and the leave encashment varies from employer to employer policies.

An employee can avail leave encashment under the following events-

  • During the continuation of service.
  • At the time of retirement or superannuation or resignation.

Tax liability and exemption under section 10 (10AA) for Leave Encashment-

Leave encashment during the continuation of service is always taxable. No exemption is allowed.
Leave encashment received by his family members after the death of employee is not taxable in the hands of family members.
At the time of retirement or superannuation or resignation.

For Govt. Employees-

Leave encashment at the time of retirement or superannuation or otherwise received by a Govt. employee, is fully exempted. No tax would be levied on that amount.

For Example:

Mr. R is a government employee and he is entitled to 30 days leave per year. His outstanding earned leaves are 350. He received Rs. 10,00,000 on account of leave encashment at the time of retirement. What is the tax liability?

Solution:

Mr. R is a Government employee and amount received of Rs. 10,00,000 on his retirement is fully tax free.

For other Employees-

Leave encashment at the time of retirement or superannuation or otherwise received by any other employee, is exempt to the extent of certain limit.

Least of the following is exempt from tax-

  • Leave Encashment actually received.
  • 10 months average salary
  • Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of completed service.
  • Rs. 3,00,000

However, please note the below:

Salary means Basic Salary+ Dearness Allowance + Commission if paid on percentage of sale.

Average Salary means salary earned by an employee immediately preceding 10 months from the date of retirement.
Unavailed leave calculated on the basis of maximum 30 days leave for every year of completed services. If employer allowed entitling for leave encashment of 40 days, leave calculated on the basis of maximum 30 days or if employer allowed entitling for leave encashment of 25 days leave calculated on the basis of 25 days.
If an employee receives leave encashment from more than one employer, the quantum of exemption will be computed independently in respect of each employer.
The total amount of exemption should not exceed Rs.3, 00,000/- during his lifetime.

For Example:

Mr. P is a Non Government employee and he is entitled to 40 days leave per year. He availed 600 days leave during his service tenure. He rendered 30 years 7 months in an organization. At the time of retirement his Basic Salary was Rs. 50,000 and Dearness Allowance was Rs. 20,000 from the past 10 months. He received Rs. 10,00,000 on account of leave encashment at the time -of retirement. What is the tax liability?

Solution:

1. Leave encashment actually received i.e. Rs. 10,00,000

2. 10 months average salary @ (50,000+20,000) i.e. 70,000 PM x 10 months = 7,00,000

3. Cash equivalent of unavailed leave on the basis of 30 days leave for every completed year of service = 30 days x 30 years = 900

Less: Already availed = 600
Balance unavailed leave = 300 i.e. 10 months
Amount comes to Rs. = 10 months * 70,000 per month = 7,00,000

4. Rs. 3,00,000

Exempted amount is least of the above i.e. 3,00,000
Tax implication on leave encashment – Amount actually received = 10,00,000
Less: Exempt under section 10(10AA) = 3,00,000
Balance Taxable Amount = Rs. 7,00,000

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22 Comments

  1. Ansaasar Deepti says:

    I was appointed in 1985 under Indian P&T Department and continued my service in Department of Telecommunication till 30-09-2000. Later from 01-10-2000 I was absorbed in the newly formed Central Government PSU the BSNL and continued my service there till my retirement in 2019. I am now getting my pension from the Government of India as per CCS 1972 rule as a Govt. of India, Service Pensioner also. I am altogether having 15 years of Government service and 19 years of BSNL service by which I had received a sum equivalent to Rs 2,81,250/- as 125 days Leave Encashment during my Government service period and Rs 3,93,750/- as 175 days Leave Encashment during BSNL period of service. For the excess amount of Rs 93,750/- exceeding the exemption limit of Rs 3,00,000/- during the BSNL period was taken up for the Income Tax calculation, which was paid up in the AY 2020-21 and the total Leave Encashment amount for exemption was by default shown in the ITR e-filing as Rs 5,81,250/-, a sum of Leave Encashment received from Govt. Service period plus the exemption amount of 3 Lakhs for the BSNL period.
    But now the Income Tax department has objected the exemption of Government Service period, the Rs 2.81,250/- from exemption and asked for Income Tax remittance. Cant I claim the exemption under sub clause (i) of section 10(10AA), of Income Tax Act 1961 for my Leave Encashment during Government service added up with sub clause (ii) of section 10(10AA), of Income Tax Act 1961 for the BSNL period of service ?

  2. Kuppa.R.Gadilingappa says:

    Sir, I am retired aided degree college employee (handicapped) and I have received ₹.6,34,430/- as leave encashment amount at the time of IT filing return A.Y. 20-21 shown as fully exempt of tax so is it provision sir. Pl.reply at the earliest.
    Thanking you Sir Yours faithfully KUPPA.R.GADILINGAPPA.

  3. Rajni Jain says:

    Kindly clarify if an employee of a private company resigns in Jan 21 and leave encashment is calculated by company but it is not paid to the employee till 31 st March 2021 it is still outstanding/payable in books of employer, if the same will be taxed in the hands of employee for F.Y. 20-21

  4. M Venkataiah says:

    was taken VRS from BSNL on 31.01.2020 after 10 years service in DOT and 20 years in BSNL, I was entered in DOT , Govt of India and subsequently absorbed in BSNL, Govt of India undertaking, and I am also getting pension from Govt of India as per CCS 1972 rule as Govt of India employee , BSNL employees absorbed from DEpt of Telecom governed by CCS pension rule, My question is whether leave encashment got at the time of retirement for both DOT and BSNL period fully exempted . But DoT period is exempted and BSNL period only 3 Lakhs exempted shown in Form 16, whether full amount will be exempted , pl clarify.

  5. Bhausaheb Pathade says:

    Whether Bank employee come under Government employee for the purpose of claiming full exemption for leave encashment at the time of retirement.?

  6. Rohan says:

    whether the Gratuity, PF and Leave Encashment received from Nationalized bank on death of employee taxable or not in hand of legal heirs.
    Is Employee of Nationalized bank treated as Govt employee or not.

  7. Lokanath Das says:

    I was taken VRS from BSNL on 31.01.2020 after 10 years service in DOT and 20 years in BSNL, I was entered in DOT , Govt of India and subsequently absorbed in BSNL, Govt of India undertaking, and I am also getting pension from Govt of India as per CCS 1972 rule as Govt of India employee , BSNL employees absorbed from DEpt of Telecom governed by CCS pension rule, My question is whether leave encashment got at the time of retirement for both DOT and BSNL period fully exempted . But DoT period is exempted and BSNL period only 3 Lakhs exempted shown in Form 16, whether full amount will be exempted , pl clarify.

  8. P Vijayasarathi Sai says:

    I retired from service from Oriental Insurance Company Ltd wef 31st May 2018. From the amount of Leave encampment I hv received at the time of my retirement Rs.3 lakhs was only exempted and the balance amount was subjected to tax.
    Kindly clarify whether I am entitled for total exemption of the amount of Leave encashment received at the time of retirement. Oriental Insurance Company is a PSU.

  9. vishal says:

    If a person has been given Leave Encashment @ 22 days per year on resignation, what will be the basis of no. of days leave for every completed year of service for calculating the exemption amount ? In simple words, if LE is calculated @22days for each completed year of service for the purpose of payment, then for exemption amount calculation purpose, shall we take 22 days or 30 days?

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