For tax treatment of leave encashment u/s 10(10AA) of Income Tax Act 1961 the employees has been classified into two types :
- Government Employees
- Non-Government Employees
Government Employees
As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is exempt from tax.
In Simple, any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
Non-Government Employees
In the hands of non-Government employee exemption will be least of the following:
Least of the following shall be exempt from tax:
a) Amount actually received
b) Unutilized earned leave* X Average monthly salary
c) 10 months Average Salary**
d) Rs. 3,00,000
* While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each completed year of service rendered to the current employer
** Average salary = Average Salary*** of last 10 months immediately preceding the retirement
***Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based commission
Ready Reckoner
| Sl. No | Leave encashment | Taxability for Government Employees | Taxability for Non-Govt Employees |
| 1 | During period of service | Fully taxable | Fully taxable |
| 2 | At the time of retirement or separation (other than on account of Termination) | Fully exempt | Leave Exemption is least of the following: 1) Rs 3,00,000 2) Leave encashment amount actually received 3) 10 months’ salary (on the basis of average salary of last 10 months ) * 4) Cash equivalent to leave to the credit of employee at time of retirement ** |
| 3 | At the time of termination of employee | Fully taxable | Fully taxable |
Leave Encashment Calculator
Check here for Leave Encashment Calculator – Earned Leave & Half Pay Leave for Government Employees
