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Taxation Rules for Leave Encashment - Brief Overview

CS Lalit Rajput , Last updated: 06 July 2023  
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Leave encashment is a process in which an employee receives monetary compensation in exchange for unused or accumulated leave days. In many organizations, employees are entitled to a certain number of paid leave days per year, which can be taken for various reasons such as vacation, personal or family emergencies, or illness.

Leave encashment is often provided as a benefit to employees as it allows them to receive financial compensation for leave days they did not utilize. It can be particularly beneficial for employees who are unable to take their leaves due to work commitments or personal circumstances.

Leave Encashment is the mechanism by which your unused leaves can turn into additional income and allows employees to receive compensation for their accumulated unutilized leave balance.

Taxation Rules for Leave Encashment - Brief Overview

Different types of leaves typically available to employees

  • Casual Leave
  • Earned Leave Or Privilege Leave
  • Medical Leave
  • Holiday Leave
  • Maternity Leave etc.
 

Taxation of Leave Encashment (before amendment)

Sl.

Particulars of Leave Encashment

Taxability

1

Received During Service

The entire amount is considered taxable and forms part of their 'Income from Salary.'

*please note that tax benefits can be claimed.

(section 89 and Form 10E under IT Act 1961)

2

Received at the time of retirement or resignation:

For Govt. Employees: fully tax-exempt.

For Non-Govt. Employees: partly exempt and partly taxable. (Follow Section 10(10AA)(ii))

3

Legal Heir of a Deceased Employee:

fully tax-exempt

 

Latest Update by CBDT

Central Board of Direct Taxes (CBDT) raises tax exemption on leave encashment for non-govt salaried employees to ₹25 lakh.The direct tax authority said that the relief applies to the period of earned leave in the credit of the employee at the time of retirement whether on superannuation or otherwise. It is effective from 1 April, 2023.

The total tax-exempt amount under a section in the Income Tax Act dealing with leave encashment of salaried private sector employees shall not exceed the limit of Rs. 25 lakh.

 

In the case of government employees, the entire leave encashment amount received is tax exempt. In the case of private sector employees, the benefit is subject the conditions listed under section 10 of the Income Tax Act, which deals with incomes exempt from taxation.

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Published by

CS Lalit Rajput
(Company Secretary)
Category Income Tax   Report

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