Encashment or leave
(Section 10(10AA) of
the Income Tax Act)
encashemnent is a facility provided by employers to its employees to
get paid in cash for their accumulated leaves. Paid leaves can be
accumulated and encashed either during employment or at the time
retirement or on resignation from employment.
of Taxability of Leave Encashment
- Leave Encashed during the employment
Taxable - when Leaves are encashed during the employment, the amount
received is fully taxable for both government and non government
- Leave encashment at the time of retirement or on
resigning from employment
- For Central & State Government Employees leave
encashment on retirement and resignation is not taxable at all - Fully
- For non Government Employees least of the following
will be exempt-
- Amount as specified by Central Government -
Presently ₹3,00,000 is specified
- 10 months salary (on the basis of average salary of
last ten months)
- Actual amount of leave encashment
- Cash equivalent of the unutilised paid leaves
- (Calulations are explained with example at the end of
the article )
Encashment on termination from employment will be fully taxable.
encashment received by Legal Heirs of a deceased employee will
be fully exempt.
of Employment explained
- Government Employess - State Government & Central
- Non government Employees - Employess of all private
companies and PSUs. (Public Sector Employees are also treated as non
- Salary for calculation of exemption will be average
salary of last 10 months of employment and will include basic salary +
DA + Commission (based on fixed % of turnover).
- Employees are entitled for maximum 30 days of leave
per year as paid leave for each completed year of service .
- In case multiple job switches, ₹3,00,000
will be the overall limit considering all employments. If ₹1,00,000
leave encashment was exempt at first resignation then in future balance
₹2,00,000 will be considered for exemption.
Ramgopal retired after completing 20.3 years of service. Earned leave
remaining to his credit were of 340 days. He was enitled for 32 days of
earned leave per year. During the employment he had encashed 300 of
earned leaves. His salary at the time of retirement was ₹
Leave Encashment Exemption amount will be ₹
Least of the following will be exempt-
Encashment Received = 340* 1500
|(Average salary per
day = 45000/30=1500)
months Salary = 10* 45000
equivalent of leaves in credit = 300*1500
|Completed years of service = 20
Max allowed paid leave per year = 30
Total Leaves entitlement = 20*30 = 600
Leaves already encashed = 300
Leaves entitled for encashment on retirement = 600-300 = 300
( this calculation will be done on the basis of maximum leaves allowed
per year as per law ie. 30 days per year)
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