Summary: The taxability of benefits received at retirement, such as leave encashment, gratuity, and voluntary retirement payouts, varies under the Income Tax Act, 1961. Gratuities are exempt for Central or State Government employees and members of Defense services under Section 10(10). Private sector employees may also claim partial exemptions, subject to limits such as ₹20,00,000 for gratuities. Encashment of unutilized earned leave at retirement is fully exempt for government employees under Section 10(10AA). For others, the exemption is capped at specific conditions, including a maximum period of 10 months’ leave encashment or ₹25,00,000 for retirements after April 1, 2023. Voluntary retirement payments under Section 10(10C) are tax-exempt up to ₹5,00,000 if made per prescribed schemes. Employees must meet conditions like service duration and limits on leave encashment to avail these exemptions. For example, if an individual receives ₹12,00,000 as leave encashment but the maximum exempt limit is ₹10,00,000, the remaining ₹2,00,000 is taxable. Proper adherence to limits and rules ensures compliance and maximization of tax benefits.
TAXBILITY OF LEAVE ENCASHMENT AT THE TIME OF RETIREMENT.
Any employee retired from his job, many benefits are received by him like Gratuity, Leave encashment, amount received on Voluntary Retirement etc., whether it is taxable or exempt or partly taxable and partly exempt?
Gratuities:
Gratuities received by an employees under different categories of are exempt from tax to the extent mentioned below:
- Death-cum-retirement gratuity: This type of gratuity received by the employees of Central or State Governments, local authorities or members of the Defence services are totally exempt from tax under section 10(10) of the Income tax, Act and should not, be included in the salary income.
- Gratuity received under the Payment of Gratuity Act, 1972: Such amount of gratuity is exempt, to the extent it does not exceed the amount in accordance with the provisions of sub sections(2) & (3) of section 4 of the Payment of Gratuity Act, 1972, as provided in section 10(10)(ii) of the Income Tax Act, 1961. Gratuity exempt from tax is accordingly to be calculated.
The extent of exemption for gratuity for the purposes of Income Tax is as under:
(a) for every completed year of service or part thereof in excess of six months, based on the rate of wages last drawn by the employee, 15 days wages
(b) the amount of gratuity payable to an employee subject to a maximum of Rs. 20,00,000
- Gratuity received by employees of Private Sector and Statutory Corporations:
This will be applicable to the employees not covered under any two of the above.
Gratuity received on retirement, death of the employee or termination of employment as exempt under section 10(10)(iii) of the Income Tax Act, to the extent mention below.
Gratuity not exceeding one and half month salary for each year of completed service calculated on the basis of average salary for 10 months immediately preceding the month in which any such event occurs subject to such limit as may be notified by the Central Government, at present such limit is of Rs. 20,00,000
Encashment of unutilized earned leave by retiring employees: Section 10(10AA)
Cash equivalent of leave salary received at the time of retirement whether on superannuation or otherwise is wholly exempt in the case of Central or State Government employees.
For others: Cash equivalent of leave salary received at the time of retirement whether on superannuation or otherwise is exempt subject to certain conditions and limits explained as under:
(1) Earned leave entitlement must not exceed 30 days for every year of actual service rendered by him as an employee of the employer from whose service he has retired.
(2) Earned leave so encased must not be for more than 10 months.
(3) Leave salary must be based on average salary drawn by the employee during ten months immediately preceding his retirement.
(4) The sum so payable shall not exceed Rs.25,00,000, where the employee retire after 1st April,2023, before that it was Rs.3,00,000.
(5) Even if non – Government employee have received the sum from different employers in different or in the same previous year, the celling limit stated in (4) above will be applied on all such payments put together if such payment received earlier had not been taxed.
Example: Mr. Atul Shah an employee of M/S A & Co. limited, at the time of retirement was paid Rs.10,00,000 as cash equivalent of earned leave to his credit. He retired on 31st January, 2024. His monthly salary at the time of retirement was Rs 1,00,000. He was drawing this sum from March, 2023 onwards. The earned leave to his credit at the rate of retirement was 12 months. The company allows earned leave at the rate of one month (30Days) for every year of actual service.
Average Salary for preceding 10 months Rs.1,00,000
Maximum period of leave that can be encased 10 months
(a) Leave salary admissible : Rs.10,00,000
(b) Maximum exemption permissible: Rs.25,00,000
LowerisRs.10,00,000 qualifies for exemption Rs.10,00,000
So whatever Mr. Atul received is fully exempt. If Mr. Atul has received Rs. 12,00,000 as leave encasement, Rs. 2,00,000 will be added to his salary income.
Voluntary retirement: Section 10(10C)
Any amount received or receivable by an employee on his voluntary retirement in accordance with any scheme or schemes of voluntary retirement or in the case of a public sector company a voluntary separation is exempt to the extent such amount does not exceed Rs. 5,00,000.
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