Tax on Leave Encashment

Hi Community-

Good morning!

I need help with Tax Computation for Leave Encashment paid

Please suggest.

Regards,
Ann

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Hi,

Leave Encashment during the Service:-
Any leave encashed during service is fully taxable and forms part of ‘income from Salary’. However, a relief under [Section 89]can be claimed.

1. Section 89(1) provides for relief to an assessee when salary, etc., is paid in arrears or in advance or if he receives in one financial year salary for more than 12 months or a payment which under the provisions of clause ( 3 ) of section 17 is a profit in lieu of salary and therefore, his income is assessed at a rate higher than at which it would have otherwise been assessed. This relief is granted by the Income-tax Officer on an application made to him in this behalf .

2. The question of admissibility of relief under section 89(1) in respect of amounts received on encashment of leave salary while in service was considered by the Board. The Board are advised that relief under section 89(1) read with rule 21A of the Income-tax Rules would be admissible in respect of encashment of leave salary by an employee when in service. The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted, by insertion of clause ( 10AA ) in section 10, by the Finance Act, 1982 with effect from 1-4-1978.

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):
a. Amount notified by the Government** i.e. 300,000
b. Actual leave encashment amount
c. Average salary* of last 10 months
d. 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 fixed percentage of turnover secured by employee

**Specified amount of Rs 3,00,000 is the aggregate amount allowed as exemption irrespective of frequency of leave encashment received by employee by various employers. If an employee has utilised Rs 2,00,000 already at the time of first resignation, he is only entitled to use balance of Rs 1,00,000 for the exemption computation next time. Hence, overall employee is allowed total exemption of only Rs 3,00,000 with respect to leave encashed from all employers.

3 Likes

Hi @Ann

In case employee have not taken leaves and have opted for encashing those leaves, employer would be paying some amount as leave encashment. The amount so received on account of encashing the leaves not availed would be liable to tax under head “Income from Salary”.

Encashment of leave during tenure of service of an employee, is fully taxable and no exemption is allowed.

Leave encashment of accumulated leave at the time of retirement whether on superannuation or otherwise received by any other employee is exempt from tax to a certain limit. In such a case, the least of the following shall be exempted:-

  1. Leave encashment actually received
  2. 10 months “average salary”
  3. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of completed service.
  4. Amount specified by the Govt i.e. Rs. 3,00,000
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