Leave Encashment Tax Treatment

By | June 24, 2016

Leave Encashment

Taxation of Leave Encashment

  • Section 10(10AA) of the Income-tax Act, 1961, provides for exemption of the amount received by an assessee by way of leave encashment, under certain conditions and to a certain extent.
  • Any leave encashment received by an employee of the Central Government or a State Government at the time of his retirement whether on superannuation or otherwise is totally exempt.
  • Any leave encashment received by a non-Government employee at the time of his retirement whether on superannuation  or otherwise  will be exempt up to Lower of following
    • A maximum of 10 months’ average salary drawn by the employee during the period of ten months immediately preceding his retirement  whether on superannuation or otherwise .
    • Monetary limit that the Central Government may prescribe for this purpose. (The present limit prescribed by the Government is Rs. 300000 which is the maximum admissible to a Central Government employee)

 Note:- the entitlement to earned leave of an employee shall 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 ;

Calculation of Leave Encashment and its Tax Treatment

Mr. X, a senior executive in a private company, retired from service after putting in 25 years of service. He was entitled to earn leave during service at the rate of 40 days for every completed year of service. He actually availed earned leave for 600 days while in service, and encashed the balance of 400 days at the time of retirement. He received leave encashment

Leave Encashment 400 Days

Salary Last  Drawn Rs 34900

A. He received leave encashment for 30 days of Every year= 400 *34900/30 = Rs 465333

B. Average Salary of Last 10 months before retirement / resignation.

SR. Month BASIC   Total
NO.   Rs.   Rs.
       
1 Jun-15 31400.00   31400.00
2 Jul-15 31400.00   31400.00
3 Aug-15 31400.00   31400.00
4 Sep-15 31400.00   31400.00
5 Oct-15 31400.00   31400.00
6 Nov-15 31400.00   31400.00
7 Dec-15 31400.00   31400.00
8 Jan-16 31400.00   31400.00
9 Feb-16 31400.00   31400.00
10 Mar-16 31400.00   31400.00
         
    314000.00   314000.00

 

AVG.SALARY(BASIC+DA+FDA)FOR 10 MONTHS PRECEDING OF SEPERATION. = Rs 314000

C. Maximum Exemption Limit Rs 300000

Taxable Leave Encahment Rs 465333 – 300000 = Rs  165333/-

Section 10AA of Income Tax Act

Incomes not included in total income.

10 .In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(10AA)   (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement  whether on superannuation or otherwise ;

(ii)    any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement  whether on superannuation  or otherwise as does not exceed  ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement  whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit  applicable in this behalf to the employees of that Government :

                      Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause  shall not exceed the limit so specified  :

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause  shall not exceed the limit so specified , as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

Explanation.—For the purposes of sub-clause (ii),—

the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

 

 

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