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Taxability of Leave Salary under Income Tax

Updated: Oct 13, 2021

What is Leave Encashment ? Well, the concept of leave encashment is not new. In every organization, employee is entitled to some leaves during a particular financial year. The employer may avail those leaves or he/she may avail the leaves partly and balance leaves can be allowed to be accumulated and carried forward to next years. There may be situation that employees may have balance of leaves at the time of retirement/superannuation. Employee is provided with money i.e. encashment of the unutilized leaves even at the time of his/her service or at the time of retirement. Here we will have look at what are the provisions in Indian Income Tax regarding the taxability or otherwise of this leave encashment. 1.Taxability of Leave Encashment during the period of Service Any Leave Encashment received during the service period of any employee is fully taxable under the head Salary Income and the only relief which can be allowed is under Section 89 - Arrears of Salary. 2. Taxability of Leave Encashment at the time of Retirement/Superannuation There are two categories under this head :

(a) Leave Encashment in the hands of Central/State Govt. Employees

Any Leave Encashment received by Central/State Govt. Employees at the time of Retirement/Superannuation is fully exempt. (b) Leave Encashment in the hands of Employees other than Central/State Govt. In case of Leave Encashment received by any employee who is not serving under Central/State Govt. , the exemption is restricted to the amount calculated as per Section 10(10AA)(ii) of the Income Tax Act as under : ‌ The Least of the following is exempt :

1. The amount notified by the Govt. which is Rs.300000

2. Actual Leave Encashment amount received

3. Average Salary of Last 10 months

4. Salary per day * unutilized leave (max. 30 leaves per year) * no. of years of completed service

The limit of Rs.300000/- is overall limit from one or more employer i.e. the overall exemption from all employers shall not exceed Rs.300000/-

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