A salaried individual is entitled to a minimum number of paid leaves annually by their employer. However, it is not mandatory for an employee to use all the allowed leaves in the same year. The unutilized paid leaves at the end of the year are carried forward to next year. Employees are compensated for the unused leave balance, particularly when they retire or resign from the company. This compensation is known as Leave encashment.
Leave Encashment received during your employment is considered a part of “Income from Salary” and is fully taxable. However, under section 89 of Income tax act, employees can get some tax relief. For this, you need to submit form 10E online in Income tax portal.
Leave encashment received by:
Exemption limit under Section 10(10AA)(ii):
As per section 10(10AA)(ii) of the Income Tax Act, exemption on leave encashment received by a non-government employee is lower of the following 4 amounts-
| Exemption Criteria | Calculation |
|---|---|
| 1. Period of earned leave standing to the credit at the time of retirement × average monthly salary (max 30 days per year | Per day basic salary x 30 days × years of service |
| 2. 10 months’ average salary | Monthly basic salary × 10 |
| 3. Maximum amount as specified by the Central Government | ₹ 25,00,000 |
| 4. Leave encashment actually received | Actual leave encashment received. |
**For calculating exemption- Salary will include Basic Salary & Dearness allowance (if it forms a part of the salary)
Example: Ram, an employee of ABC Pvt. Ltd retired after 10 years of service.
Ram was allowed 32 days of paid leave per year from his company. i.e, total 320 days of leave during his service. Out of which, Ram has used 120 days of paid leave and his unutilized leave balance is 200 days.
Ram’s Basic salary at the time of retirement is Rs. 30,000 pm. He received Leave encashment of Rs. 2,00,000 (200 days* 1000 per day basic salary).
The minimum of the following 4 will be exempt:
| S. No | Exemption Criteria | Formula | Calculated Exemption |
|---|---|---|---|
|
1 |
Period of Earned Leave Standing to the Credit × Average Monthly Salary (max 30 days per year) | Per day basic salary × 30 days × Years of service | Rs. 1,000 × 30 × 10 = Rs. 3,00,000 |
|
2 |
10 Months’ Average Salary | Monthly basic salary × 10 | Rs. 30,000 × 10 = Rs. 3,00,000 |
|
3 |
Maximum Amount as Specified by the Central Government | Rs 200 (Rs 100 each under CGST and SGST Act) | Rs. 25,00,000 |
|
4 |
Leave Encashment Actually Received | Actual leave encashment received | Rs. 2,00,000 |
Ram is eligible for an exemption of Rs 2,00,000 which is lowest of the above amounts. Thus, the leave encashment of Rs. 2,00,000 is fully exempt.
THANK YOU
Prepared by: Team “Taxcellent”
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