Leave Encashment Revolution: Decoding New ₹25 Lakh Exemption

For more than two decades, leave encashment on retirement created a striking tax anomaly between government and non-government employees. Under section 10(10AA)(ii), employees of the private sector, PSUs, nationalised banks and other non-government institutions could claim exemption only up to ₹3,00,000, a figure notified as far back as 31 May 2002 through Notification S.O. 588(E). By contrast, Central and State government employees, covered by section 10(10AA)(i), enjoyed full exemption without any monetary ceiling. This disparity became progressively indefensible as salaries, pay scales and retiree benefits rose sharply over the years. The issue ultimately reached the courts, most prominently in Kamal Kumar Kalia v. Union of India (Delhi High Court), where bank and PSU retirees argued that the outdated ceiling discriminated against them. Although the Court declined to place PSU and bank employees at par with government servants, it acknowledged that the ₹3-lakh limit had become obsolete, and directed the Government to re-examine and revise the exemption in view of inflation, increased pay levels and overall financial growth. This judicial nudge laid the groundwork for the significant reform that would follow. Also Read: Leave Encashment: Filing An Application Under Section 119(2)(B)

CBDT Notification No. 31/2023 – the game-changer

In response to judicial concerns and the long-pending demand for rationalization, the CBDT issued Notification No. 31/2023, F.No. 200/3/2023-ITA-I dated 24 May 2023 under section 10(10AA)(ii), enhancing the exemption for leave encashment on retirement for non-government employees to ₹25,00,000. The notification expressly states that it “shall be deemed to have come into force with effect from 1 April 2023”, and its Explanatory Memorandum emphasizes that “no person is being adversely affected by giving retrospective effect” to this change. A Press Release dated 25 May 2023 further clarified that this new limit applies to non-government salaried employees retiring on or after 01 April 2023. In effect, the Government’s position on paper is clear: the increase is prospective in operation from AY 2024-25 (FY 2023-24), yet retrospective in form, ensuring that nobody suffers by applying the higher limit from 1 April 2023. The open question, however, is whether this beneficial revision can also be invoked by retirees of earlier years, such as 2018-19, 2019-20 or 2020-21, who paid tax on leave encashment under the earlier ₹3-lakh ceiling — a question that has now been squarely examined in four recent ITAT decisions.

Case 1 – Chandra Prakash Vashistha v. ITO (Jaipur ITAT, ITA 1139/JPR/2025, AY 2021-22)

• Retired SBI employee from Jaipur; received ₹13,05,810 as leave encashment.
• CPC/143(1) and CIT(A) restricted exemption to ₹3,00,000.
• Appeal before ITAT was delayed by 959 days; delay condoned, considering age (65+), pensioner status and confusion in getting advice.
• On merits, the Bench noted CBDT Notification 31/2023 enhancing the limit to ₹25 lakh and treated it as beneficial instructions with retrospective operation for non-government employees, following earlier Jaipur precedents.
• Result: entire ₹13,05,810 treated as exempt u/s 10(10AA); AO directed to apply revised limit.
• Very liberal condonation of delay in filing appeal where the issue is a beneficial tax relief.
• Tribunal explicitly recognises retrospective benefit of the ₹25-lakh limit to AY 2021-22.

Case 2 – Govardhan Deepchand Bhambhani v. ITO (Ahmedabad ITAT, ITA 289/Ahd/2025, AY 2020-21)

• Retired from Punjab National Bank; received ₹7,65,404 as leave encashment in FY 2019-20.
• Return filed 25-12-2020 claiming full exemption u/s 10(10AA)(ii). CPC restricted to ₹3 lakh; CIT(A) upheld, saying the 25-lakh limit is only from 01-04-2023 and retiree had already retired earlier.
• Before ITAT, assessee relied on Notification 31/2023 plus Jaipur bench rulings Ram Charan Gupta, Govind Chhatwani and Devendra Kumar Gupta, where Tribunal had applied the 25-lakh limit to earlier years.
• Tribunal held:
  • Notification 31/2023 is beneficial and, read with its explanatory memorandum, has retrospective effect.
  • Earlier Jaipur decisions upholding full exemption even for AY 2020-21 were followed.
• Result: full ₹7,65,404 allowed as exempt; disallowance of ₹4,65,404 deleted.

Case 3 – Vijay Kumar Jain / Anil Kumar Khattri (Agra ITAT, ITA 175 & 187/Agr/2022, AYs 2019-20 & 2020-21)

• Both assessees were SBI retirees; claimed leave encashment exemption of ~₹7.5 lakh (AY 2019-20) and ~₹7.18 lakh (AY 2020-21).
• CPC initially allowed full exemption; later rectified u/s 154 restricting to ₹3 lakh each.
• CIT(A) confirmed the 154 rectification.
• Agra Bench looked to:
  • Delhi HC decision in Kamal Kumar Kalia (recognizing the need to revise limits), and
• Jaipur ITAT ruling in Ram Charan Gupta which expressly applied Notification 31/2023 and the ₹25-lakh limit to an AY 2020-21 case.
• Agra Bench held:
  • CBDT’s revision to ₹25 lakh is a beneficial measure.
  • Assessees are “eligible to claim deduction in view of limits raised to ₹25,00,000” even for AY 2019-20 & 2020-21.
• Result: rectification restricting exemption to ₹3 lakh reversed; full exemption up to actual leave encashment amounts allowed.

Case 4 – Devi Dutt Agarwal v. Assessment Unit, Jaipur (Jaipur ITAT, ITA 1375/JPR/2024, AY 2020-21)

• Individual salaried assessee; original return (Dec 2020) claimed ₹3 lakh exemption; revised return (May 2021) claimed ₹12,13,200 full leave encashment as exempt.
• AO allowed only ₹3 lakh; CIT(A) agreed, insisting on prospective application of Notification 31/2023.
• ITAT:
  • First condoned 326 days’ delay in filing appeal due to serious eye ailments and surgeries.
  • Reproduced s.10(10AA) and Notification 31/2023, then cited Kamal Kumar Kalia (Delhi HC) and Jaipur bench decisions in Ram Charan Gupta and Govind Chhatwani.
  • For consistency, held that assessee is entitled to claim full leave encashment up to ₹12,13,200 under the new ₹25-lakh ceiling.

• Result: AO directed to accept claim as per revised return; full exemption allowed.
• It involves a revised return and directly addresses the situation where an assessee has changed the claim after initially taking only ₹3 lakh.
• Again, the Tribunal carries the ₹25-lakh limit backwards to AY 2020-21.

The emerging judicial trend

Across these decisions, and in earlier Jaipur rulings such as Ram Charan Gupta, Govind Chhatwani and Devendra Kumar Gupta, a clear judicial trend has emerged. The Tribunals consistently treat CBDT Notification No. 31/2023 as beneficial and clarificatory, rather than a new restrictive provision. The emphasis in the Explanatory Memorandum that “no person is being adversely affected by giving retrospective effect” has been used to justify applying the enhanced limit even to pre-2023 retirements. Wherever the actual leave encashment received is below ₹25 lakh, the full amount has been treated as exempt for AYs 2019-20, 2020-21 and 2021-22. Just as significant is the Tribunals’ attitude towards delay, where condonation has been granted even for hundreds of days, especially when the assessee is a senior citizen or retiree, and when the trigger to contest arose only after Notification 31/2023. At the same time, caution is warranted: some courts and appellate authorities, including the Patna High Court in Purnendu Shekhar Sinha, have viewed the ₹25-lakh ceiling as purely prospective from 01-04-2023, and have declined relief for earlier years; and every ITAT ruling remains subject to appeal by the Revenue before the High Courts. Thus, while the direction of the law clearly favours retirees, the position has not yet achieved uniform nationwide finality.

Revision/ updating the returns

This naturally raises the most practical question: what about retirees who left service before 01-04-2023 and paid tax on leave encashment above ₹3 lakh — how far back can they go to seek relief? The usual method of correction through a revised return under section 139(5) is not available in such cases, because a revised return can be filed only up to the statutory cut-off, currently nine months from the end of the relevant assessment year, and for AYs 2019-20, 2020-21 and 2021-22 that window has long since closed. The alternative of an updated return under section 139(8A) is technically open for two years from the end of the assessment year, but this mechanism is designed to increase income, attracts additional tax of 25–50%, and is not suitable where the taxpayer has already correctly disclosed the leave encashment and merely seeks a larger exemption or refund in view of the enhanced ₹25-lakh limit. In short, for most bank and PSU retirees of 2018–19, 2019–20 and 2020–21, both the normal revision route and the ITR-U route are effectively closed.

Rectification u/s 154

Where an assessee already has an intimation under section 143(1) or an order under sections 154 or 143(3) which restricted the leave encashment exemption to ₹3 lakh, it is still possible to seek rectification, provided the four-year time limit from the end of the financial year in which that order was passed is still open. For example, a typical SBI retiree who left in FY 2019-20 would have an AY of 2020-21, and if the 143(1) intimation was issued in December 2021 (FY 2021-22), the four-year rectification window would run until 31 March 2026. This is essentially where the popular “up to five assessment years” notion circulating in retirees’ WhatsApp groups comes from practically speaking, many AY 2020-21 cases remain rectifiable up to 31-03-2026. In such situations, the retiree can simply file an online rectification under section 154, requesting the CPC or the Assessing Officer to apply Notification 31/2023 and the growing body of ITAT decisions, and if rectification is refused, the matter can be taken on appeal to the CIT(A) and, if necessary, further to the ITAT, as seen in the recent Agra and Ahmedabad Bench cases.

Condonation under section 119(2)(b) – the “safety valve”

For very old assessment years, or in cases where the normal windows for rectification or revision have already expired, the only meaningful statutory remedy is section 119(2)(b) of the Income-tax Act. This provision empowers the CBDT to authorise income-tax authorities to entertain a late claim for exemption or refund “to avoid genuine hardship,” even after statutory time limits have passed. CBDT’s Circular No. 9/2015, now supplemented by the more recent Circular No. 11/2024 and related instructions, provides the operative framework: condonation applications may generally be considered up to six years from the end of the relevant assessment year, which is currently being refined to five years for new applications, and the authority to grant condonation is divided among the Pr. CIT, CCIT and CBDT depending on the quantum of refund.

For leave-encashment matters, the situation typically involves a refund case, because excess tax was deducted on leave encashment or paid via self-assessment at the time of retirement, on the basis of the old ₹3-lakh ceiling. A large number of retirees today fall comfortably within this 5–6 year window (for example, AYs 2019-20, 2020-21 and 2021-22), and can therefore submit a condonation request under section 119(2)(b) using the online portal feature titled “Filing after time-barred (u/s 119(2)(b))”, together with a time-barred return or revised computation correctly claiming the full leave-encashment exemption up to ₹25 lakh, supported by recent ITAT rulings. There is, at present, no nationwide 119(2)(b) circular issued specifically for leave encashment, but CBDT has a long history of issuing issue-specific condonation directions such as for late filing of Forms 10-IC, 10-ID, special returns and other procedural lapses.

Considering (i) the large volume of impacted retirees, (ii) the clear beneficial intent behind Notification No. 31/2023 and (iii) the growing body of ITAT orders in favour of retirees, it is entirely plausible that CBDT may either issue a general 119(2)(b) circular permitting condonation of delayed claims for the enhanced leave-encashment exemption subject to monetary limits and time conditions, or at least clarify through FAQs or a press note that Assessing Officers and appellate authorities should not reject rectification or appeal relief merely on timing grounds, where the assessee is otherwise within the condonation framework. Until such a policy clarification emerges, the recommended route for retirees from earlier years whose time limits have expired is to pursue individual applications under section 119(2)(b), supported by correct computations and copies of recent tribunal decisions.

Practical guidance – who can still benefit, and how?

(A) Retired after 01-04-2023

Employees who retired on or after 1 April 2023 are clearly covered by CBDT Notification No. 31/2023 on a plain and straightforward reading. For such cases, the enhanced exemption limit of ₹25,00,000 for leave encashment at retirement applies without controversy, and practical care is required only to ensure correct implementation. The employer or disbursing authority—whether a bank, PSU, or private organisation—should not deduct tax from leave encashment amounts up to ₹25 lakh, and the employee’s income-tax return must accurately reflect the exemption under section 10(10AA)(ii) so that no tax is inadvertently paid or refunded later through subsequent proceedings.

(B) Retired in Earlier Years (FY 2018–19 to FY 2022–23)

For retirees of earlier financial years, the path to relief depends on how much time has passed since retirement and whether statutory time windows remain open. Broadly, three categories emerge. First, where the assessment or intimation still falls within the four-year rectification window under section 154, a simple online rectification application may be filed, relying on Notification 31/2023 and the growing body of supportive ITAT rulings such as Ram Charan Gupta, Govind Chhatwani, Devendra Kumar Gupta, Vijay Kumar Jain (Agra), Govardhan Bhambhani (Ahmedabad), Chandra Prakash Vashistha (Jaipur) and Devi Dutt Agarwal (Jaipur). If rectification is denied, the matter can be taken further through appeal accompanied by a request for condonation of delay, exactly on the lines accepted in these cases. Second, where the section 154 window has closed but the assessee still falls within roughly five to six assessment years, the appropriate route is a condonation application under section 119(2)(b), treating the matter as a late refund claim based on enhanced exemption. Such an application should be accompanied by a revised computation showing the refund, proof of leave encashment and tax deducted, citations of relevant ITAT orders, and a clear explanation that the assessee acted promptly only after the law became clear in 2023–2025, thereby demonstrating genuine hardship. Third, in the case of very old retirements where even the 119(2)(b) window has expired, the scope of relief becomes limited: the only possibilities are either a constitutional challenge, which is impractical for an individual retiree, or a future one-time CBDT relaxation that may extend time limits. For such years, expectations must remain modest, and claimants may have to wait for a broader administrative decision.