What is Income Tax Exemption Under Section 10(10AA)?

Taxability and exemption related to leave encashment can be understood as:-

  • Any Amount Received as Leave Encashment during employment, then the amount received will totally be taxable in all forms. But according to Section 89 Income Tax Act, the employee can claim tax relief from their leave encashment amount.
  • Any Amount Received as Leave Encashment at the time of retirement then Any Leave Encashment amount received by an employee of the Central Government or a State Government shall be fully exempt. Any Leave Encashment amount received by the employee (other than mentioned above) shall be exempt up to a certain amount, i.e., The average salary of 10 months. The salary includes basic salary and dearness allowances. Also, the commission received is considered. The salary of 10 months considered is based on the salary received during the 10 months preceding their retirement or resignation.

Note 1:- Even if the Non-Govt. the employee has accumulated a number of leaves in a year; as per the Provision Of Income Tax Act, the department will consider only a maximum of 30 days of leave for a year for the Calculation of the exempted amount. According to it, the total number of paid leaves will be calculated altogether during the retirement or resignation, and then encashment will be processed further.

Note 2:- The legal heirs of deceased employees at the time of leave encashment can receive the amount without any form of tax deduction from the amount.

Note 3:- In case of resignation or termination, government, and non-government employees are held to pay the tax on the amount received from paid leave encashment because the amount at the time is considered income from salary by the income tax department. The rate of tax to be paid is applied the same as during income tax on salary.

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