Earned leave means the leave accrued to the employee in proportion of the work done by him. This varies from employer to employer. For example in government sector, the earned leave is 2.5 days for every month worked. This 2.5 days is granted with a view to provide him rest to enable him to recover from the stress and strain endured by him during the course of his work. This can be accumulated and either taken in the subsequent months or encashed as per the rules extant in force. If leave standing to the employee’s credit is not taken within a year, as per the service rules, it may lapse or it may be encashed or it may be accumulated. The employee can avail the accumulated leave during his service tenure or it can be encashed at the time of retirement or leaving the job. Encashment of leave by surrendering leave standing to one’s credit is known as leave salary.
The taxation of Leave salary for various categories of employees is shown here under:
Status of Employee
Nature of Leave Encashment
|Government/ Non-Government employee||Leave encashment during Continuity of employment||It is chargeable to tax. However relief can be taken under section 89|
|Government employee||Leave encashment at the time of retirement / leaving job||It is fully exempt from tax under section 10(10AA)(i)|
|Non-Government employee||Leave encashment at the time of retirement / leaving job||It is fully or partially exempt from tax in some cases under section 10(10AA)(ii)|
In Simple words from the above tabloid summary we can conclude that Leave Salary is chargeable to tax only in two cases first accumulated leave being enchased by any class of employee- Govt. or Non Govt. during the continuation of employment whereof it is fully chargeable to tax.
Second being accumulated leaves enchased by a non govt. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary comes into picture which can be calculated as LEAST of the following:
a. Cash equivalent of the leave salary in respect of the period of earned leave standing to the credit of employee at the time to retirement/superannuation (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired); (See Note- 1)
b. 10 months’ ‘average salary’; (See Note- 2)
c. Rs. 3 lakh (applicable from 01.04.1998);
d. The amount of leave encashment actually received at the time of retirement.
How to find out leave standing to the credit of an employee at the time of retirement or leaving the job
Step (a) – Find out duration of services in number of years (ignore any fraction of year).
Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).
For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service.
Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:-
Step (a) × Step (b) minus Step (c) ÷ 30
How to find out Average monthly salary?
Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.
Other relevant points for Leave Salary encashment Exemption
Download- Leave Salary encashment calculator
(Republished with amendments)