CA Srikant Agarwal

CA Srikant AgarwalMany organisation provide the facility of encashment of leave (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)

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

S.N Leave encashment timing Govt Employees 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 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 can be explained with the help of an example:

Example: Mr. Gupta retired on 1.12.2014 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. 1.4.2014)

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

Regards,

CA Srikant Agarwal

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25 responses to “Leave Encashment or Leave Salary Tax Treatment Sec 10(10AA)”

  1. 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.

  2. 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

  3. 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.

  4. 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

  5. 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.

    • 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

  6. Nayna Bagdai says:

    I am working in state govt.i received leave encashment in current month is it taxable?

  7. 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.

  8. sunithasheshadhri says:

    Hi Sir,

    Even I am looking for same details(Leave encashment policy benefits) as per our shops & Est Karnataka for our employees.
    Please share to my email Id samsupri2@gmail.com

    Regards,
    Sunitha

  9. viswa says:

    where i deduct E.L amount in returns as per 10 AA rule

  10. viswa says:

    where i deduct E.L amount in returns

  11. Samadhan Sadashiv More says:

    Respected Sir,
    Please give me calculation sheet in excel format Salary Leave Encashment

  12. jayanta says:

    sir, i want that type of problem ,which contents of leave entitled excess 30 days and less than 30 days.please give more example

  13. 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.

  14. 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

  15. 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 ?

  16. 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.

  17. 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 “

  18. 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.

  19. 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.

  20. DEEPAK DANG says:

    The Status of leave encashment of PSUs, BANKS, LICs etc. may be explained.

  21. Avadh Kishore Sharma says:

    Very good article. Thanks

  22. 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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