Many organisation provide the facility of Leave Encashment (by whatever name called be it earned leave, sick leave etc) either

1) during the period of employment or

2) at the time of retirement (including separation on account of resignation, retrenchment, VRS etc other than termination) of the employee or

3) at the time of Termination of the employee

For tax treatment of leave encashment u/s 10(10AA) of Income Tax Act 1961 the employees has been classified into two types:

1) Govt Employees and

2) Non-Govt employees (PSU employees are considered as non-govt employees)

Leave Encashment or Leave Salary Tax Treatment Sec 10 (10AA)

The tax treatment of Leave encashment is explained with the help of following table:

S.N Leave encashment timing Taxability of Leave Encashment for Govt Employees Taxability of Leave Encashment for Non-Govt Employees
1 During period of service Fully taxable Fully taxable
2 At the time of retirement or separation (other than on account of Termination) Fully exempt Leave Exemption is least of the following:
1) Rs 3,00,000
2) Leave encashment amount actually received
3) 10 months’ salary (on the basis of average salary of last 10 months ) *
4) Cash equivalent to leave to the credit of employee at time of retirement **
3 At the time of termination of employee Fully taxable Fully taxable

* Here salary means Basic + Dearness Allowance (forms part of pay) + Commission (Fixed % on turnover)

** Cash equivalent to leave to the credit of employee at time of retirement is

= {(A X B) – C} X D

Where

A) No of completed year of service (excluding part of the year)

B) Number of leave credited each year (Subject to maximum of 30 leave per year)

C) Number of leave taken or leave encashed during period of employment

D) Average salary for last 10 months

The following additional points should be noted:

i. Where leave salary is received from two or more employers in the same year, then the aggregate amount of leave salary exempt from tax cannot exceed Rs 3,00,000

ii. Where leave salary is received in any earlier year from a former employer and again received from another employer in a later year, the limit of Rs 3,00,000 will be reduced by the amount of leave salary exempt earlier.

iii.   Relief u/s 89 read with Rule 21A can be claimed by the employee in cases where the amount of leave encashment is fully taxable.

iv. Leave salary (or leave encashment) received by the legal heir of the deceased employee is not at all taxable in the hands of his legal heirs (F.35/1/65-IT(B), dated 5-11-1965)

The treatment of leave salary/ Leave Encashment can be explained with the help of an example:

Example: Mr. Gupta retired on 1.12.2017 after 20 years 10 months of service, receiving leave salary of Rs 5,00,000.

Other details of his salary income are:

Basic Salary : Rs 5,000 p.m.(Rs 1,000 was increased w.e.f. 1.4.2017)

Dearness Allowance : Rs 3,000 p.m. (60% of which is for retirement benefits)

Commission : Rs 500 p.m.

Bonus : Rs 1,000 p.m.

Leave availed during service : 480 days

He was entitled to 30 days leave every year.

What will be the taxable leave salary assuming:

(a) He is a government employee.

(b) He is a non government employee.

Solution:

(a) He is a government employee.

Leave Salary received at the time of retirement                  Rs 5,00,000

Less : Exemption under section 10(10AA)                        Rs 5,00,000

Taxable Leave salary                                                                   Nil   

(b) He is a non-government employee

Leave Salary received at the time of retirement                      Rs 5,00,000

Less : Exempt under section 10(10AA) [See Note below]    Rs    26,400

Taxable Leave Salary                                                                   Rs 4,73,600

Exemption is least of the following:

1) Statutory Limit                                                                        Rs 3,00,000

2) Leave encashment amount actually received                    Rs 5,00,000

3) 10 months’ salary

{(5000*8)+(4000*2)+(60% of 3,000 *10)*10}/10              Rs  66,000

4) Cash equivalent to leave to the credit of employee at time of retirement

((20*30)- 480)*(6600/30)                                                           Rs  26,400

(Republished with amendments on 28.06.2018)

Click here Checkout how to calculate leave encashment

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93 Comments

  1. Parveen Kumar says:

    I retired from DAV College, Sadhaura which is a Government Aided Private College affiliated to Kurukshetra University. I received Leave Encashment of Rs10,18,972 after retirement. Is is taxable or fully exempted. Please through light keeping inview Rana vs ITAT case Delhi

    1. SURENDER SINGN RANA says:

      i am teacher in govt 95 % aided college. on my retirement leave encashment will be exempted from tax or not.Please clarify with rule and evidence.

  2. K MADAN MOHAN says:

    I worked in Hindustan Petroleum Corpn. Ltd, and retired in January 2019. Regarding leave encashment Rs. 3 lakhs exempted and balance amount given after deducting 30 percent income tax. Now I came to know that I can claim full exemption of leave encashment. Pl. Clarify.

  3. JANAK DAVE says:

    For Leave encashment at the time of retirement, Whether Nationalised Bank Employee is treated as Govt Employyes and can claim full exemption or it is restricted to Rs. 3 lacs only. Kindly clarify.

  4. Narendra kumar SRIVASTAVA says:

    Sir, I retired fr SBI on June 2019 and form 26AS shows my salary income rs.1578184.15 whereas form 16 rs. 1278184.15 i.e. rs. 300000.00 of leave encashment is excess in Form26AS. Can I show it in sec. 10(10aa) in IT return.

  5. Venkat says:

    Sir, As per sec 10(10AA) leave encashment is fully exempt for Govt employees. I retired from a nationalised bank on August 2020. In this case whether I have to remit tax over and above 3 Lacs and claim refund or else directly I can claim exemption without remitting tax. It will help lot of bank retirees if you clarify the basic rule. Thanks in advance

  6. ASHWANI KUMAR says:

    Sir
    I am retired from govt. Bank in Dec 2019 and I received leave encashment Rs 850000/- Pl clarify how to calculate the tax and oblige.

    Regards

    Ashwani kumar

  7. A B Vaviya says:

    Sir, I retired from bank service on 31-07-2019, I rec’d leave encashment of Rs 908000/- please guide me how much amount tax free for me, I am not filed this year IT return. Thanks awaited your early reply in the mater

  8. Raveendra kurup says:

    Sir, Please clarify whether State Bank of India comes under Government for the purpose of considering income tax eligibility for leave surrender on retirement, as SBI has been constituted under a special act in Parliament.

  9. Akhilesh Kumar Dixit says:

    I had retired from PSU bank on 31st May 2019. Should I get exemption on full leave encashment amount. Pl guide. Amount is Rs. 8.80 lakhs.

  10. Dilip Kumar DasGupta says:

    , Sir,i retired from Nationalised bank on Feb.2019.on superannuation. Whether my leave encashment is fully exempted. Whether I being considered as govt. Employee u/s 10(10aa) n exempted fully . Pl reply.

  11. Ravishankar MS says:

    Sir, i retired from Nationalised bank on April 2019.on superannuation. Whether my leave encashment is exempted. Whether i being considered as govt. Employee u/s 10(10aa) n exempted fully . Pl reply.

  12. VS MURTHY says:

    Is it correct that leave encashment beyond 300 days also at the time of retirement of a PSU employee is not taxable like in the case of Government employees from 1-4-2018. WhatsApp viral post is in circulation say that one chief manager of bank has taken up and CBDT has clarified. We do not find any such directions on the cbdt website. Can you please throw some light?

    1. subhash bhardwaj says:

      From whatsapp messages i came to know that leave encashment at the time of retirement is fully exempted from income tax for a banker wef 1/04/2018.Is this true,if it is what is the income tax circular number /judgement number of the supreme court

  13. Sudhir Johar says:

    sir
    I was retired from public sector bank I got Rs 9 lac of leave encasement on superannuation whether it is fully exempted from tax

    1. Hiteswar Das says:

      I have retired from bank service on 30/09/19 and I received an amount of RS.10 lacs as leave encashment. Is this entire amount is free from Income Tax?

    2. Rajendra pal kushwaha says:

      I am a retired banker from a nationalised bank.Leave encashment of Rs.566827= received by me is taxable or full exempted.? Kindly guide me.

  14. Ramesh says:

    There is an error in your calculation item
    4) Cash equivalent to leave to the credit of employee at time of retirement

    ((20*30)- 480)*(6600/30) = Rs 26,400

    This calculation should be
    ((20*30)-480)*66000/30 = 264000
    PL availed amt should be calculated on daily wages
    ie 66000/30
    I think u missed out on a zero there

  15. D.Kaliaperumal says:

    Sir I have retired on VRS in BSNL(Government of India Enterprise) on 31.01.2020 . I have received leave encashment Rs.1040010. Our office has exempted upto the DOT (Department of Telecom) period up to 30.09.2000 for which leave accumulated for Rs.346670. Remaining during the BSNL period Rs.300000/- exempted. Remaining Rs.393340 is liable for tax and accordingly Tax deducted. I received information from some sources in PNB that the entire leave encashment is exempted under section 10(10aa). is it correct sir.

  16. jeekey says:

    if an emplyee retires in say 31.03.2017 , but his encashment of leave will be paid in the month of APRIL-2017, TDS will be calculated based on the income of FY 2016-17 or 2017-18?

    1. Tarun Talwar says:

      Whether a bank employee retiring in fy 2019-20. Eligible for rebate under sec 10 10aa for full amount of leave encashment.

  17. ASHOK KUMAR ADHIKARI says:

    Sir,
    I retired from LIC on January-2019, and received Rs. 9.01Lac as leave encashment.
    How much amount of leave encashment is exempted and how much is taxable.
    Please guide me.
    Regards;
    A K Adhikari

  18. P Srinivasu says:

    I am P Srinivasu, Can you explain ELs payment calculation procedure, is’t to take Basic salary or last drawn basic. If any section as per Act, please specify.

    1. R K SHARMA says:

      Whether an employee of an Autonomous Body of Central Government will be treated Central Government employee for exemption U/S 10(10AA) of Income Tax Act for encasment of leaves after retirement.

  19. VINOD SRIVASTAVA says:

    SIR,
    The leave encashment to non government employees was exempted maximum Rs. 300000/- on retirement. this limit of Rs. 3 lac was derived from the maximum salary of cabinet secretary (x10 months) of government and increased after every pay commission till 1991 through notification by income tax department. in 1991 the salary of cabinet secretary was Rs.30000/-. with subsequent pay commission implementation the salary was increased but required notification was not issued by Govt./ income tax department. By now the exemption limit should have been Rs 2.50 lac x10 (25 lac). will you please comment and guide on this lacunae, thanks

  20. anand barot says:

    please sir help me
    my job left 1.5 months ago but leave encashment not clear ,i m discuss with HR Department but no possitive reply how to solve my problem

  21. SIMHACHALAM says:

    Sir,
    Please clarify, PSU employees are not not government employees is it correct?
    If it z correct plz provide correct evidence.

    Please clarify my doubt

  22. B.SRINIVASULU REDDY says:

    Sir,
    I am State Government employee. I am in service at present. After retirement Earned Leave encashment is exempted from Income Tax. where in service employee are exempted for Surrender Leave or not may kindly be clarified sir.

  23. Hemant Khade says:

    In Income Tax Act/Rule 10AA(I), there is mention of only earned leave. That means exemption is allowed only on encashment of Earned Leave and not sick leave.

    Pls clarify

  24. Bhupinder Singh says:

    Sir retired superannuation I collect more than 8Lakh Amount I govt employee from punjab State our A officer Deduct Tax Above 3 Lakh @ 20% Is it Right or Asper rule 10(10-10A.A)(1) is correct, no tax on superannuation retired employee of Govt service from punjab State

    1. Jagadish H.C says:

      I had retired from service from aided education institution and have income from pension and enchashment of earned leave at the time of retirement. please clarify whether the encashment of earned leave is fully exempt or not

  25. R.Gopalakrishnan says:

    IS TAMIL NADU AGRICULTURAL UNIVERSITY STAFF WILL COME UNDER TAX EXEMPTION WHILE RETIREMENT IF THERE IS PROVISION PLEASE SEND MY E MAIL ID THE GO

    1. inacio says:

      Are employees of govt aided institution Govt employees within the ambit of Sec10(10AA) of Income tax Act & so Totally exempt from TDS on leave encasment on Retirement?

  26. DEBKUMAR MONDAL says:

    My uncle received Rs.4,96,890/- against Leave encashment after retirement of National Insurance Company Ltd. please tell me how much amount taxable.

  27. Pramod t chaudhari says:

    Mhada is a Govt Statutory Body of Maharashtra Govt Establish on 1976 by Govt of Maharashtra Employee of Mhada Treated as Govt Employee or How they are Treated and what is trement for there leave salary

  28. P.K. Sharma says:

    Is section 10 (10AA) not discriminatory between Govt and non Govt employees? Are these provisions not violation of fundamental rights of non Govt employees? Can PIL be filled on the matter

  29. Gyaneshwer singh says:

    11lakh amount is received against leave encashment after retirement of rajasthan raj utpadan nigam ltd. ( ie rajasthan State govt. Under taking ) is t
    axable or not.

  30. Ashok K Gupta says:

    I am an employee of an Autonomous Body under Ministry of Human Resource Development, Govt of India.We are equally treated as Government employee. I have applied through proper channel to some other Autonomous Body under MHRD.

    Now I have tendered my Technical Resignation upon my selection to another Autonomous Body. I have accumulated approx leaves of 150 days (including EL/ HPL). As per the rule 39(2B) or so, I shall be encashing all the leaves at my credit, for which exemption prevail in line with the available provisions under section 10(10aa) of Income Tax Act, as learned from various sources.

    But my Account Officer is stating that the receipt of amount towards encashment of Earned Leave will be taxable, which is contradictory to what section 10(10AA) states i.e. the leave encashment of government employees is exempted.

    I would really appreciate if you could enlighten/ guide me on the issue before it is escalated too much.

  31. P K GUPTA says:

    LEAVE ENCASHMENT ON RETIREMENT OF PSU EMPLOYEE EXEMPTED UP TO rS.300000/- WHILE SUBMITTING RETURN ON LINE ITR 1.WHERE I HAVE TO SHOW OR TOTAL SALARY TO BE SHOWN LESS BY 3 LACS

  32. Omkar Pendse says:

    Hi,
    I received leave encashment which i changed companies. My ex employer has not mentioned the same in Form 16 and TDS has been deducted on the total amount i received as part of full and final settlement. how to i claim relief while filing my returns. which ITR should i use and under which head should i mentioned the leave encashment amount in form 10E.

  33. Narayan maru says:

    I am retired in bank service and encash leave it 1 not seen the colm which act insert in column and pension encash which colm to correct return file

  34. ajay arya says:

    sir, I retired from bank and got leave encashment of rupees 844385/-. Out of this amount rupees 3 lac is fully exempt. Kindly inform me whether this amount is to be shown alongwith rupees 1.50 lacs investment under section 80c or some other place.

    1. Partha Sarathi Mukherjee says:

      sir, I retired from bank and got leave encashment of rupees 763000/-. Out of this amount rupees 3 lac is fully exempt. Kindly inform me how we show the relief in my personal return along with Gratuity relief

  35. Sanjib Dutta says:

    In the financial year 2015-16 I have worked at two PSU. Hence i have two form 16. I resigned from the first PSU after working 5 year 8 months and hence i got leave encashment and gratuity at the time of resignation. Now my question is which form to fill up for IT.

  36. B.K.Mishra says:

    Please explain the position of bank employees vis-a-vis govt/non-govt. employees for the purpose of getting exemption of leave salary amount on retirement.

  37. Sanchit says:

    Can you please highlight the fact why termination of employment would be taxable? Kindly refer to the judgement Third Income Tax Officer Vs. M.A. Badlaney

  38. CSR RAO says:

    The Status of leave encashment for BANK employees ? Whether they come under Government or non government ? What is the status of tax on Gratuity received above Rs 10.00 Lakhs in case of Bank Officers ?

  39. Anil says:

    A quick Question w.r.t Leave encashment tax treatment for NON-GOVT employee in case of seperation (not termination) – Can this exemption be availed only once in Lifetime or more than once in case of more than one jobs at different companies. Please advice asap.

    1. ANIL KUMAR AHUJA says:

      i have got leave encashment as retrenchment on the basis of gross pay e.g. gross salary P M 50000K and basic salary 20000k please confirm can i get tax benefit on the basis gross salary or only on the basis of basic salary 20000/-

  40. Anand S says:

    Dear Srikant
    Your answer to this simple question was so impressive.

    It has prompted me to seek your guidance in a matter. Please guide me on this. I am confused.

    ” A property was in the name of three persons – Son, Father & Daughter-in-law. While purchasing of this flat at Rs 19.12 lacs , contribution came from son(12.00 lacs) and father(7.12 lacs) and NOT from the daughter-in-law.
    This flat was sold, in 33 months after the purchase, for Rs 22.11 lacs (which was also the government price) thus giving an STCG of app. Rs 3 lacs.
    1. Can Rs 2 lacs be reported as STCG in the son’s ITR & rest Rs 1 lac in the ITR of the father ?
    2. What should be taken as Acquisition Cost , Selling Price & Govt Price for the son’s ITR ?
    19.11 lacs / 3 * 2 i.e. 12.74 , 14.74 & 14.74
    or
    19.11 , 22.11 & 22.11 lacs “

  41. Jaikishan says:

    I retired on 30apr.15.My basic salary was rs46000.I received rs 92000for pl encashment and rs 92000 for sl encashment. So whether both amount should be tax-free or one amount should be tax-free. Kindly advise.

  42. Senthil says:

    I am filing ITR-2 for AY 2015-2016 (FY 2014-2015), I have received a Leave Encashment when I resign my previous job in above mention period. I came to know that Leave Encashment at the time of leaving the job is tax exempted as per sec 10(10AA)(ii). But I could not find the correct column in ITR-2. Please assist me where I can mention 10(10AA)(ii) amount in ITR-2.

    1. K.C.Taluja says:

      I resigned from a private bank and joined another organisation. I received an amount of Rs.3,10000 in liue of my unavailed leave. . Please advise me the treatment of this amount in my income tax return, whether it is taxable or non taxable.

    2. K Dutta says:

      Hi Senthil,
      I am in same situation and stumbled on your post. Can you please mention how did you file this using ITR-2?
      Thanks a ton.
      Regards.
      Krishna

  43. shivanand says:

    sir
    Thanks and fine advise
    Please share – LEAVE encashment and Leave at credit under shops & Est. and Factories act in Karnataka -(quoting procedure/law as per labour dept)

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