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)
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)
Author Bio
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
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
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.
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?
PSU employees are not Government employees
Whether Nationalised bank employee is under government employee category or non government employee falls. Kindly clarify
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
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.
Any change for treating the leave encashment salary while retirement in connection with IT u/s 10AA
whether mumbai mahanagar palika employees are knows as government employees
Any change of leave encashment rule for retirement of psu employee for tds purpose
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
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
I am government sallaried private college retired teacher. Is there fully exmtion from tax leave encashment income?
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
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.
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
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
Hello sir
Is leave encashment taxable for employee of private aided institution where he gets salary from state government?
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
My uncle received Rs.4,96,890/- against Leave encashment after retirement of National Insurance Company Ltd. please tell me how much amount taxable.
is there any exemption above 3,00,000 el
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
IS RESIGNATIONS FROM JOB AMOUNTS TO TERMINATION? WHAT ABOUT LEAVE ENCASHMENT RECD ON RESIGNATION?
Why PSU bank employees are treated as non govt
Employees. Pl quote section or judgement .
PSU employee is treated as non Govt. Employee
By it law. Has it been defined in act itself.
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
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.
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.
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
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.
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
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.
I am working in state govt.i received leave encashment in current month is it taxable?
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.
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
where i deduct E.L amount in returns as per 10 AA rule
where i deduct E.L amount in returns
Respected Sir,
Please give me calculation sheet in excel format Salary Leave Encashment
sir, i want that type of problem ,which contents of leave entitled excess 30 days and less than 30 days.please give more example
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.
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
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 ?
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.
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 “
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.
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.
The Status of leave encashment of PSUs, BANKS, LICs etc. may be explained.
Very good article. Thanks
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)