prpri Tax Treatment of Leave Encashment Salary Tax Treatment of Leave Encashment Salary

CA Yogesh Sarawgi

YogeshIs leave encashment fully taxable?

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89 if applicable may be claimed for the same.

(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

(iii) In case of other employees, the exemption is to be limited to the least of following:

(a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service)

(b) 10 months average salary

(c) Leave encashment actually received. This is further subject to a limit of Rs 3,00,000 for retirements after 02.04.1998.

(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.

Let us understand the above Provisions in a systematic manner –

1. In the case of continuity of services.

Government/Non-Government employee Leave encashment during Continuity of employment It is chargeable to tax. However relief can be taken under section 89

As per Income Tax Act, 1961 u/s 10(10AA)

2. Leave encashment at the time of retirement / leaving job

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)

Second being accumulated leaves enchased by a non govt. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary is calculated as LEAST of the following:

1. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered.
2. 10 × Average monthly salary.
3. The amount specified by the Government  i.e., Rs. 3,00,000 /-;
4. Leave encashment actually received at the time of retirement.

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.

Leave encashment taxable amount = Actual encashment received – Exempted u/s 10(10AA) given above

(Republished with amendments)

Click here Checkout how to calculate leave encashment

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46 Comments

  1. Vijay Kumar Trisal says:

    Sir, I retired from central government services on 31.5.2019 and am getting my pension from 1.6.2019.while filing my IT return for 2019-2020,it is showing that my leave encashment EL IS MORE THAN MY SALARY. AS I HAVE RECEIVED FULL SALARY FOR THREE MONTHS ONLY REMAINING PERIOD I AM GETTING PENSION ONLY, AS SUCH THERE IS THIS DIFFRENCE. PLEASE GUIDE ME HOW TO CORRECT IT. SHOULD I SUBMIT THE RETURN AS IT IS OR WHAT SHOULD I DO
    REGARDS .

  2. sridharan seshadri says:

    i am a retired bank employee retired last year.
    tax was deducted on my leave encashment above 3lacs.
    bank deducted about 1.70 lacs on my leave encashment after giving benefit if 3clacs.
    whethervi can claim for refund of rs 1.70 lacs while filibg it return.
    whether a public sector bank is a governmrnt organisation as i am told that in casebog govt. employees leave encadhmebt id fully exempted from tax.

  3. PRASHANT PARIKH says:

    I have a some doubt regarding exemption of Leave encashment. would request you please clear my doubt.
    1. Exemption is eligible in the case of relieving the job (resign by employee) ?
    2. Exemption is eligible in the case of contract ended which has been made between employee and employer ?.

  4. Subhash Chandra says:

    I was retired from PSU on 30th June 2019. At the time of retirement I received half pay leave encashment. Whether Rs 3 lacs exempted from this u/s 10 (10AA) of IT Act

  5. Kothandaraman says:

    I retired from Bank of Baroda in month of January 2019.Please let me know the treatment of Leave encashment. Whether it’s fully exempted or upto only three Lac. (Leave encashed @ 9 lacs).

  6. Kothandaraman says:

    I retired from Nationalised Bank in month of January 2019.Please let me know the treatment of Leave encashment. Whether it’s fully exempted or upto only three Lac. (Leave encashed @ 9 lacs).

  7. Kothandaraman says:

    I retired from Nationalised Bank in month of January 2019.Please let me know the treatment of Leave encashment. Whether it’s fully exempted or upto only three Lac.

  8. sreenatha prabhu says:

    An official retires from Government service submitting technical resignation and joins another PSU. He takes all retirement benefits from Government including 300 days leave encashment and Rs525000 towards leave salary (10 months Average pay) . Subsequently during the service in the PSU he accumulates another 300 days and retires from service Leave encashment of Rs.800000 /- is received As a pay drawing officer, TDS was deducted @20%on the full amount of Rs.800000, as the said official have availed 300 days tax free benefit of leave salary for life time during Government service (it was fully exempted from tax ). Please state the action of deducting TDS on the full amount is justified..
    Also please state how to treat retirement s when there is a combination of services in various for employee in various organizations including Government and Non Government services

  9. Narinderpal singh says:

    How leave encashment is calculated whether on the basis of salary drawn on the last month salary, or on the basis of average of 10 month salary drawn?

  10. IMAMUDDIN says:

    BANK EMPLOYEE SUPERANNUATED ON 31.03.2020 BUT HE GOT LEAVE ENCASHMENT IN APRIL 2020. PLEASE ADVISE IN WHICH FINANCIAL YEAR IE FY 19-20 OR FY 20-21 HE HAS TO PAY INCOME TAX IN EXCESS OF RS. 3.00 LAKHS AND BY WHICH DATE HE HAS TO PAY.
    THANKS AND REGARDS

  11. RAMACHANDRAIAH AMMANABROLU says:

    I GOT RETIRED ON 30.11.2019 FROM A PSU BANK UNDER SUPERANNUATION AND RECEIVED 8 MONTHS LEAVE ENCASHMENT OF RS.8.00 LAKHS. PLEASE ADVISE THAT TOTAL OF 8.00 LAKS IS EXEMPTED FROM IT FOR THE YEAR

  12. Sunil Kumar Loomba says:

    I retired from United India insurance company, a Public sector insurance company. How much amount I will get exemption, if I get 10 lac leave encashment on superannuation.

  13. Sivanath N M says:

    All are equal in the eyes of law.
    On Retirement.
    Government employees are exempt in IT for full amount of leave encashment while psu employees have to pay tax on leave encashment. The same should be addressed by press and politicians to the Income tax authorities.
    All should be exempted from payment of income tax.

  14. KK GUPTA says:

    please guide whether income tax exemption on leave encashment at the time of retirement of government comany will be available or not

  15. Bhausaheb Shridhar Dakhane says:

    I am retired State Bank Employees, retired on 30 April, 2018,earned leave encashment money of Rs. 715000/-pls.advise Income Tax exemption on leave encashment.

  16. Bhisham Dev Justa says:

    I retired from Punjab National Bank in month of January 2019.Please let me know the treatment of Leave encashment. Whether it’s fully exempted or upto only three Lac.

  17. Nayna shah says:

    Sir,
    I hv received rs. 617700 as leave encasement for 240 days after retirement at the age of 60 yrs. I was employee of State Bank. How many any exempted for it. Retired in April2018.

    Awaiting yr reply.

    Nayna shah

  18. Meenakshisundaram S says:

    An employee is retiring on 30th March 2019. He is getting leave encashment of Rs 577000 by means of cheque dt 02.04.2019. In which financial year this encashment in excess of Rs. 3 lakhs to be included. Kindly clarify

  19. K Rangappa says:

    Sir,
    I am a retired employee of Karnataka Power Corporation Ltd (public sector company). I have got an amount of Rs 1552820/- by terminal earned leave surrender. Please inform this amount is taxable or not.
    Thanks and regards.

  20. Anil Kumar says:

    I am employee. My deptt. Was govt. Deptt. Prior to 2009. Later on it convert in limited utility. I.e. Himachal Pradesh electricity Board to Himachal Pradesh electricity board limited. Will I get benefit of tax exemption of leave encashment at the time of retirement. As I have 300 days earned leave in my account when my deptt. Convert govt. Deptt. To limited utility.

  21. Priyanka Thakkar says:

    Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable. Is there any case laws ?

  22. ANJAN KUMAR DAS says:

    i received an amount of Rs.1500000 as leave salary after my retirement.My average 10 months salary prior to retirement is more than 1200000.may i show taxable income as Rs.1200000 and tax exemption as Rs.300000 in income tax return.

  23. JAGADEESH CHANDRAN says:

    Iam a retired Bank officer( State Bank) on 31.7.2016 and received a sum of Rs.889426/- as leave encashment (240 days). How much exemption myself is entitled to.

  24. Jayakumar says:

    Sir,
    Iam a retired employee of Kerala State Electricity Board Ltd (public sector company). I have got an amount of Rs 265341/- by terminal earned leave surrender. Please inform this amount is taxable or not.
    Thanks and regards.

  25. Naresh Kumbahre says:

    My friend is a Government employee. Earlier, he was in Non-industrial cadre from which he has been abosorbed to Industrial cadre with continuity in service.Since the leave accumulated in Non-industrial cadre can not be carried forward to Industrial cadre, his leave accumulated in Non-industrial cadre was encashed during FY 2014-15 and paid. Pl let me know whether this leave encashmnet, which was not at the instance of my friend but official procedure, is taxable or not. Thanks

  26. Bhadkamkar A V says:

    There appears confusion in the write up. In the least of four options mentioned
    2nd options is written as “10 * average months salary.” I think it should be as under.

    “The leave encashment amount arrived at the average rate for last 10 months multiplied by the no. of days of leave encashed.”

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