Leave Encashment During the employment period
Any employee demanding leave encashment for their unused paid leave during their employment period is taxable as it is considered income from salary. In this case, the employee can get tax relief under Section 89. As per Section 89, the employee can claim tax relief from the amount received through the leave encashment process.
To get tax relief for leave encashment, the employee should fill out form 10E. This form is available on the e-portal of the income tax department and, once filled, can be submitted online.
Leave Encashment After retirement or resignation
At the time of retirement or resignation, the employee can avail of encashment through their accumulated paid leave. However, various conditions depend upon the type of organization in which the employee has worked.
- When the employee has worked in the central or state government organization, they can fully claim for their paid leave encashment, with full exemption from tax.
- In the case of an employee’s death before the leave encashment, their legal heirs can receive total leave encashment on behalf of the deceased. No income tax will be charged on the amount they receive.
- Employees working in the private sector or non-government sector can receive paid leave encashment at the time of retirement or resignation. The maximum tax exemption amount was Rs 3,00,000, increased to INR 25,00,000 in the New finance budget 2023 for the leave encashment otherwise, the amount exceeding this value is taxable. The calculation of exempt leave encashment is as per Section 10(10AA).