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The leave encashment tax exemption depends on whether the employee is working in the government or private sector, and whether they are encashing their leave during service or at the time of retirement. The tax treatment for leave encashment is governed by Section 10(10AA) of the Income Tax Act, 1961.
Is Leave Encashment Tax Free?
For government employees (Central or State government employees), the entire amount received as leave encashment at the time of retirement is fully exempt from income tax. For non-government (private sector) employees, leave encashment is taxable under the head "Income from Salary". However, certain exemptions are available under Section 10(10AA)(ii) when the leave encashment is received at the time of retirement or superannuation or otherwise leaving the job. Coming to how much leave encashment is tax free, the exemption amount is the least of the following:- Actual Leave Encashment Received: The actual amount received as leave encashment.
- 10 Months' Average Salary: 10 months' average salary (salary includes basic salary and dearness allowance (DA), if terms of employment so provide, and commission based on a fixed percentage of turnover achieved by the employee).
- Cash Equivalent of Leave: The amount equivalent to the leave balance (maximum 30 days for every completed year of service).
- Statutory Limit: ₹3,00,000 (This limit is fixed by the government and is applicable as of the current financial year).
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How Much Leave Encashment is Tax Free?
Arvind
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5 months
2024-06-04T10:37:12+00:00 2024-06-04T10:56:52+00:00Comment
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