Hey GreyTribe 
,
Let’s unpack a topic that every salaried employee needs to understand — Leave Encashment — and more importantly, its tax treatment in India 
What is Leave Encashment?
Leave encashment simply means getting paid for your unused earned leave days. Instead of taking time off, you convert those leave days into money. Many organisations allow this either during service or at the time of resignation/retirement.
Is Leave Encashment Taxable in India?
The short answer yes, leave encashment can be taxable, but how it’s taxed depends on when, and under what circumstances, you receive it.
Leave Encashment Received During Service
If you encash your leaves while still employed, the amount received is fully taxable and treated as part of your Income from Salary. You can claim relief using Section 89 and Form 10E if you pay higher tax due to this lump sum payout.
Example:
If your employer pays you for unused leaves in April while you are still working, that entire amount is added to your annual taxable income.
Leave Encashment on Retirement / Resignation
This is where things get more interesting 
• Government Employees
For Central & State Govt employees, leave encashment received at retirement or separation is fully exempt from tax.
A big perk of government service!
• Private / Non-Government Employees
Private sector folks get a partial exemption, subject to limits under Section 10(10AA) of the Income Tax Act. The exempt portion is the lowest of the following: Policybazaar+1
Actual leave encashment received
Cash equivalent of unutilised earned leave (capped at 30 days per year of service × avg. salary)
10 months’ average salary
₹25,00,000 (aggregate limit across employers) — newly increased from ₹3 lakh with effect from April 1, 2023. Income Tax India
So if your leave encashment is less than these calculated limits — it can be largely tax-free!
Special Case: Leave Encashment to Legal Heirs
If the employee passes away and the legal heirs receive leave encashment, this amount is fully exempt from tax too.
Why Does This Matter?
It affects your take-home pay & tax planning
Freelancers & salaried professionals often miss claiming appropriate relief
TDS may be deducted at source by employer, but you could claim a refund/exemption in your ITR if eligible.
Pro tip: Always check your Form 16/Form 16A to see how your employer reported the leave encashment. If they treated it as taxable and you’re eligible for exemption, you must claim it in your ITR return.
Quick Takeaways
| Situation | Is it Taxable? |
|---|---|
| Leave encashed during service | Fully taxable |
| Govt employee – retirement |  Fully tax-exempt |
| Private employee – retirement/resignation |  Partially exempt, upto ₹25 L (Section 10(10AA)) |
| Legal heirs (on death) | Fully exempt |
Have you ever received leave encashment?
How was it treated in your Form 16, and did you claim exemptions while filing your ITR?
Let’s discuss and share tips!