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.

Leave Salary encashment Exemption Calculation

The taxation of Leave salary for various categories of employees is shown here under:

Status of Employee

Nature of Leave Encashment

Tax on Leave Salary 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.

Note- 1

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

Note- 2

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

  • Here, Average Salary is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement or superannuation.   Salary means last drawn salary and includes basic salary + Dearness Allowance (if terms of employment so provide) + Commission based on a fixed % of turnover.
  • Where the cash equivalent of unutilised earned leave is received by an employee from two or more employers in the same year, or different years, the maximum amount exempt from tax shall not exceed the amount specified by the Government i.e., Rs. 3,00,000/-.
  •   Salary paid to legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.
  •   Sum equivalent of leave salary received by the family of a government servant who died in harness, is not taxable in the hands of the recipients.
  • In case of Non-Government employee, Leave Salary received on Resignation or Retrenchment is taxable. Of course, relief u/s. 89 r.w.rule 21A would be admissible. However, Leave Salary received on Voluntary Retirement or Compulsory Retirement is exempt u/s.10(10AA) (ii) to the extent specified therein. The scope of said section is extended to Leave encashment at the time of retirement whether such retirement is on superannuation or otherwise. The word “otherwise” covers  the case of  Voluntary Retirement from service as held by Madras High Court in CIT vs. R V Shahney (159 ITR 160).

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(Republished with amendments)

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98 responses to “Leave Salary encashment Exemption, Calculation, Download calculator”

  1. Mukhtar says:

    Sir, I am central Govt.employee . Can Income Tax will be levied on leave encashment taken for purpose of LTC ?

  2. N.Suryanarayana says:

    Sir,
    one employee continuous Earned Leave from June 2018 even in July, 2018 also. His increment date is 1st July, 2018. But he has extended his leave upto 25-08-2018. in the meanwhile he expired on 21.8.18.

    As he was not drawn increment due to continuous leave even on 1st July, 2018, kindly clarify how to calculate his encashment of leave salary on his death whether on prior to July Basic Pay or after grant of increment as usual if he alive.

  3. ARUN SHARMA says:

    SIR MY LAST BASIC AT THE TIME OF RETIREMENT IS 105900/- WHAT IS MY
    LEAVEINCASHMENT AMOUNT
    THANKS

  4. m kiran kumar says:

    Hi Sir

    I am working in one of the pvt co., i want to know the leave policy & different type of policy & leave encashment rules .can you guide me.

  5. nazia begum says:

    Sir im working in Ap transco as an AE….i want to encash my 30 days leave….. can i do tax saving?

  6. Raj says:

    Hi Sir,
    I have received 159000 Rs. as leave encashment from my past Pvt Ltd.company in Feb 2018. I have worked in that company for 4 years correctly upto Feb 2018. As per my company rules, only 30 days max. leaves for encashment. My basic salary is 43000 per month from the last 10 months (feb 2018-10 months). That company showing tax exemption only 43000 and remain 116000 as taxable in Form 16. So can you please calculate my correct taxable amt from my leave encashment for IT returns. Waiting for your reply.
    Thanks
    Raj
    M: 08885848630

  7. SANDEEP JANWALKAR says:

    I AM WORKING IN ONE OF THE NATIONALISED BANK. I AM RETIRING ON 31/07/2018 (NORMAL RETIREMENT AS I AM COMPLETING 60 YRS ON 31/07/2018. MY DATE OF JOINING THE BANK IS 13/05/1977 AND EARNED (PL) LEAVE BALANCE IS 206 DAYS AS ON TODAY. I AVAILED PL 5 DAYS AND FULL PAY SICK LEAVE OF 2 DAYS JUN 2018. THEN PL GUIDE ME HOW TO CALCULATE TOTAL NO. OF DAYS FOR PL ENCASHMENT AND WHAT WILL AMOUNT I WILL GET FOR PL ENCASHMENT. HOW MUCH I TAX WILL BE DEBITED.
    PL GUIDE

  8. ajay arya says:

    sir kindly read it as that tax liability has not shown any decrease.

  9. ajay arya says:

    sir retired from pnb. I have to request to kindly inform under which head rupees 3 lacs to be shown for exemption under leave encashment. I have filled in the form by adding the entire income as per 26 AS in my return and shown below rupees 3 lacs under section 10aa but tax liability has now decreased. Kindly guide under which coloumn rupees 3 lacs to be fillied in to take benefit of rupees 3 lacz

  10. Sunil kumar says:

    Please tell me is any amount of salary for last month excluded from salary for leave encashment reg bank retired

    • L N Rahul says:

      At the time of retirement 240 days leave was accumulated which was for last 8 year and for this leave encashment was paid.In income tax return whether i can avail benifit of section 89(1) because leave was for previous year for which encashment was paid.

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