Bank Employees Leave Encashment Tax Exemption u/s 10(10AA): Rs 25 Lakh Relief and How to Claim Refund for Pre-01.04.2023 Cases
In recent years, the exemption framework for leave encashment under Section 10(10AA) has undergone a significant change, and the implementation of this change has given rise to divergent judicial outcomes. Various Tribunal benches-and in certain cases, courts-have delivered decisions both in favour of and against the assessee, particularly on the question of applicability for years prior to 01.04.2023.
As a result, a substantial number of queries have emerged from bank employees and PSU bank retirees who had filed their Income-tax Returns for periods before 01.04.2023, paid tax on leave encashment applying the earlier ceiling, and are now exploring whether-and how-they can claim refund of excess tax paid.
This article is intended to address these practical concerns. It explains the legal background, outlines the evolving case-law position, and sets out the available procedural routes to seek relief-so that affected taxpayers can identify the most appropriate course of action based on their specific facts and limitation status.
This section summarises the applicable statutory provision (Section 10(10AA)), the change in the monetary ceiling through CBDT notifications, the latest CBDT circular guidance for TDS/computation, and the emerging litigation trend for years prior to 01.04.2023.
1) Statutory foundation: Section 10(10AA) - category-wise treatment
(A) Government employees
Section 10(10AA)(i) provides full exemption in respect of cash equivalent of leave salary received at retirement by an employee of the Central Government or a State Government.
(B) Non-government employees (covers bank/PSU bank employees)
For employees other than Central/State Government, Section 10(10AA)(ii) applies. Under this clause, exemption is not absolute and is restricted to a notified ceiling, computed through the prescribed "least of" method.
Judicial position (Delhi High Court, bank/PSU context): In Kamal Kumar Kalia v. Union of India (Delhi High Court), the contention that bank/PSU employees should be treated at par with Government employees for full exemption was not accepted, and the category remained governed by Section 10(10AA)(ii) (with the notified ceiling and computation mechanism).
2) The "relaxation": notified ceiling enhanced from Rs 3 lakh to Rs 25 lakh
(A) Earlier regime - Rs 3,00,000 ceiling
The maximum exempt amount for non-government employees was notified at Rs 3,00,000 vide Notification S.O. 588(E) dated 31.05.2002.
(B) Current regime - Rs 25,00,000 ceiling
CBDT Notification No. 31/2023 dated 24.05.2023 enhanced the notified ceiling under Section 10(10AA)(ii) to Rs 25,00,000, and states that it is deemed effective from 01.04.2023.
The PIB release explaining the notification also records the same policy intent-i.e., enhancement to Rs 25 lakh w.e.f. 01.04.2023, with aggregation controls for multiple employers and earlier claims.
(C) Aggregation restrictions (critical for practice)
As per the PIB clarification (and consistent administrative approach):
- If leave encashment is received from more than one employer in the same previous year, the aggregate exemption cannot exceed Rs 25,00,000.
- If exemption under Section 10(10AA)(ii) was already claimed in any earlier year(s), the Rs 25 lakh ceiling must be reduced by the amount already exempted earlier.
3) CBDT circular position (TDS/computation) - before vs after the change
(A) Latest CBDT circular (operational benchmark)
CBDT's Circular No. 03/2025 (TDS on Salaries) explicitly acknowledges the revised Rs 25 lakh ceiling and restates the computation methodology for non-government employees receiving leave encashment at retirement.
Under the circular, exemption under Section 10(10AA)(ii) is the least of:
- (i) Leave standing to credit × average monthly salary
- (ii) 10 months' average monthly salary
- (iii) Rs 25,00,000 (notified ceiling)
- (iv) Actual leave encashment received
(B) Position prior to Notification 31/2023
The computation methodology remained the same, but the ceiling applied was Rs 3,00,000 (arising from Notification S.O. 588(E), 31.05.2002). The Delhi High Court discussion in Kamal Kumar Kalia also reproduces and acknowledges this older ceiling framework.
4) Case-law trend for pre-01.04.2023 years: emerging split
(A) Favourable trend (beneficial/clarificatory approach)
Some ITAT benches have taken a beneficial approach and have granted relief by permitting the enhanced ceiling even for earlier assessment years (typically in cases where CPC restricted exemption to Rs 3 lakh at processing stage).
Key illustration:
- ITAT Ahmedabad - Govardhan Deepchand Bhambhani v. ITO (ITA No. 289/Ahd/2025; AY 2020-21; order dated 28.07.2025): relief granted even though the year involved was pre-01.04.2023, with directions consistent with allowing exemption within the enhanced ceiling.
Practical relevance: These orders are being relied upon to litigate older years, especially where the matter is stuck at CPC (143(1)) level and the exemption was capped at Rs 3 lakh.
(B) Contrary trend (prospective-only view)
There is also a reported contrary view-i.e., the enhancement is prospective and not available for pre-01.04.2023 years.
Example commonly cited in professional discussion:
- ITAT Chandigarh - Arvind Kumar Jolly v. ITO (ITA No. 952/Chd/2025; order dated 08.10.2025): reported to have taken the view that the enhanced Rs 25 lakh ceiling is prospective.
Practice implication: For pre-01.04.2023 years, claims are currently litigation-driven with bench-to-bench variation. Strategy must be built around jurisdiction, facts, and procedural posture.
5) Claiming the exemption for current years (post-01.04.2023): straightforward compliance route
Step 1: Compute the exemption
Compute exemption under Section 10(10AA)(ii) using the "least of" method as reiterated in Circular 03/2025, applying the Rs 25 lakh ceiling.
Step 2: Maintain critical documents
- Leave encashment settlement/sanction letter (leave days and amount)
- Working of "average salary" (Basic + DA forming part of retirement benefits + eligible commission component, where applicable)
- Form 16 / salary computation from employer
- Evidence of earlier Section 10(10AA)(ii) exemption claimed (if any), for applying the reduction rule
Step 3: ITR reporting
Report leave encashment under "Salary" and claim exemption in the relevant Schedule for Section 10(10AA) (field names differ across ITR forms/utilities).
6) Claiming benefit for periods prior to 01.04.2023: the safe framing
Case A: Leave encashment received in FY 2023-24 onwards
The claim up to Rs 25 lakh is directly supported by Notification 31/2023 and reinforced by Circular 03/2025 for computation/TDS alignment.
Case B: Leave encashment received before 01.04.2023 (older years)
CPC/departmental processing commonly restricts the exemption to Rs 3,00,000 by applying the earlier notified ceiling. The appropriate remedial course to obtain relief is not uniform and must be selected case-by-case, as each available route carries its own procedural requirements, limitation constraints, and litigation risk. Accordingly, there is no single "standard method" that can be treated as a guaranteed mechanism for securing a refund in every matter.
Set out below are the commonly adopted options. The choice of remedy should be made after evaluating the specific facts, the stage of proceedings, and the applicable timelines. For clarity on the most suitable course of action in your case, you may contact me at the details provided at the end of this article.
7) Practical relief routes for older years (refund/excess tax already suffered)
Route 1: Rectification u/s 154 (especially against CPC 143(1))
- Rectification is time-bound under Section 154(7) (generally 4 years from the end of the financial year in which the order sought to be amended is passed).
· Practical caution: Whether the restriction of leave encashment exemption qualifies as a "mistake apparent from the record" under Section 154 is often contested, particularly because the Tribunal landscape is not uniform. In many cases, rectification is rejected and the taxpayer is compelled to pursue relief through the appellate route.
That said, the expression "mistake apparent from the record" is relatively wide in practice and may cover situations where the claim was already made in the original return and the error arises solely due to CPC's processing / computational adoption. However, where the correction sought results in a reduction in Gross Total Income (GTI), taxpayers frequently face a portal-level constraint: the e-Filing system may not accept rectification under certain request types (notably "Return Data Correction"), as such workflows are generally restricted from permitting changes that alter GTI/total income.
Accordingly, where a GTI-impacting correction is required, the rectification strategy should be framed carefully-typically by selecting the appropriate request type (such as "Reprocess the Return" where the issue is purely CPC processing) or by filing a rectification request to the Jurisdictional AO through the portal where CPC rectification is blocked.
Route 2: Appeal (CIT(A) / ITAT), including condonation where needed
- Appeals against 143(1)/assessment order proceed under the normal appellate framework (with condonation provisions where delay exists).
- On merits, reliance is placed on favourable ITAT orders (e.g., Ahmedabad) while distinguishing prospective-only decisions.
Route 3: Condonation application u/s 119(2)(b) (exceptional remedy)
For time-barred claim situations, an application under Section 119(2)(b) may be explored in appropriate cases, subject to the relevant CBDT/departmental guidelines and supporting documentation. However, this remedy is not universal and cannot be treated as a routine substitute for statutory timelines. Condonation is a discretionary relief-it is considered only in specified fact patterns (typically where genuine hardship is demonstrated) and within the limitations prescribed under the applicable guidelines. Consequently, it will not assist in every matter, and the feasibility of this route must be evaluated carefully on a case-by-case basis.
Route 4: ITR-U is not a refund remedy
An updated return (ITR-U) under Section 139(8A) is generally not a workable route where the objective is refund or enhancement of refund, since updated returns are not intended to create or increase refunds.
Conclusion
The enhancement of the leave encashment exemption limit to Rs 25,00,000 under Section 10(10AA)(ii) has brought meaningful relief to bank and PSU bank retirees; however, it has also created practical challenges for taxpayers who received leave encashment and paid tax prior to 01.04.2023, particularly where CPC processing continues to restrict exemption to the earlier Rs 3,00,000 ceiling. Further, since Tribunal decisions have not been uniform on the question of applicability to earlier years, the refund position for pre-01.04.2023 cases remains litigation-sensitive and must be approached with care.
In such matters, there is no single "standard remedy" that guarantees a refund. The appropriate course-whether rectification under Section 154, appeal, or an exceptional application for condonation under Section 119(2)(b)-depends on the taxpayer's specific facts, the stage of the proceedings, and limitation timelines. Where the claim was already reflected in the original return but was not given effect during CPC processing, rectification and/or reprocessing may be the most efficient route; where the claim requires a fresh adjudication or the portal blocks GTI-reducing rectification, the appellate route may be more suitable. For time-barred situations, Section 119(2)(b) may be explored, but only within the prescribed guidelines and only in appropriate hardship-based cases.
Accordingly, bank employees seeking refund of excess tax on leave encashment should first map (i) the date of receipt, (ii) the assessment year involved, (iii) whether the restriction arose under CPC 143(1) or an assessment order, and (iv) whether the claim was already present in the original return. A structured, case-specific approach-supported by proper documentation and relevant judicial precedents-will materially improve the probability of relief.
The author can also be reached at varunmukeshgupta96@gmail.com
CAclubindia
