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)

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

  1. 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.

  2. R.Gopalakrishnan says:

    is there any exemption above 3,00,000 el

  3. 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

  4. CA Hitesh says:

    IS RESIGNATIONS FROM JOB AMOUNTS TO TERMINATION? WHAT ABOUT LEAVE ENCASHMENT RECD ON RESIGNATION?

  5. Manmohan Singh narula says:

    Why PSU bank employees are treated as non govt
    Employees. Pl quote section or judgement .

  6. Manmohan Singh narula says:

    PSU employee is treated as non Govt. Employee
    By it law. Has it been defined in act itself.

  7. 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

  8. 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.

  9. 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.

  10. 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

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