CA Yogesh Sarawgi
(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)