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Is leave encashment fully taxable?

(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) 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

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4 responses to “Tax Treatment of Leave Encashment Salary”

  1. 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.

  2. 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.

  3. 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

  4. 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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