Leave encashment calculation and amount exempt in income tax

Some leave encashment amount at resignation is exempt from income tax . How is it calculated?
What is the exemption?


Leave encashed at the time of retirement or resignation:-

  • Leave encashment received by Central or State Government employee at the time of retirement or resignation is fully exempt
  • Leave encashment received by legal heirs of deceased employee is fully exempt
  • Leave encashment received by Non-Government employee is exempt based on the computation provided under Section 10(10AA)(ii) and balance amount if any is taxable as ‘income from salary’


A. Leave Encashment Received

B. Least of the following (a to d):
1. 300,000 (** Current limit specified under IT Act)
2. Actual leave encashment amount
3. Average salary* of last 10 months
4. Salary per day * unutilised leave (considering maximum 30 days leave per year) for every year of completed service

C. Leave encashment taxable – (A) – (B)

  • Salary for this purpose includes basic salary, dearness allowance and commission based on a fixed percentage of turnover secured by employee