Relevant section of income tax

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

24 July 2018 I'm employee of an Indian PSU on foreign assignment for three year period. During FY 2017-18/ AY 2018-19, I attained NRI status. My salary is paid in the overseas branch of an Indian bank in foreign currency (USD). During the year I en-cashed leave which is fall under the head Income from Salary. My employer has outsourced the processing of the application for leave en-cashment to LIC of India who is also authorized to deduct and pay TDS on leave en-cashment amount directly to IT Department under its own TAN number and issue separate form 16 for such payments. Since leave encashment is also part of the income under the head salary LIC was advised by my employer not to deduct TDS on leave encashment based on my NRI status and accordingly LIC of India did not deduct TDS. This amount was also paid by my employer alongwith salary of the particular month in foreign currency in my bank account maintained abroad. Accordingly, in form 26AS the amount towards leave encashment has been reflected as a separate line item showing the amount paid and TDS as nil. However, LIC of India has shown this amount as income under section 192 of Income Tax Act, on which my Auditor opines that attarcts income tax. My Auditor further opines that, this should be shown as salary under an appropriate section which does not attract income tax, since leave encashment is also part of salary income which is also paid in foreign currency in my bank account maintained abroad. All other part of income like basic pay, DA and other alowances area paid directly by my employer in foreign currency in bank account abroad and based on my NRI status my employer did not show any such amount paid as income throughout the year as income in form 16 issued by my employer, being exempted from income tax based on my NRI status.
Can any one point out the appropriate section under which the above leave enacshment amount should be classified / reflected in form 26AS under deductor LIC of India so that it does not attract income tax

CA R SEETHARAMAN

CA R SEETHARAMAN (Expert)
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24 July 2018 Leave encashment is part of salary earned paid outside India not taxable in India.
No need for you to file ITR in India if you don't have any other taxable income in India.
Your employer is right in not deducting tax.
Your auditor is wrong in saying taxable in India.

Querist : Anonymous

Querist : Anonymous (Querist)

25 July 2018 Sir, my auditor does not say that it is taxable. He says that leave encashment amount paid to me has been classified under section 192 in form 26AS under deductor LIC of India (whom in this case has been entrusted to process the leave encashment application of employees and to deduct and remit TDS wherever applicable (not applicable in my case since I'm an NRI during the Assessment year) and unless this section has been changed to an appropriate section which does not attract income tax, there is a posibility of IT department issuing notice demanding payment of tax with penalty on this leave encashment portion / amount of salary
Do I need to get this section changed in form 26AS / Form 16 and if yes what is the appropriate section which covers this portion of salary income to make it eligible for tax exemption and safeguard me from getting such demand notice from IT Dept.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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21 July 2025 Great detailed query! Here’s the gist and relevant tax law references to clarify your situation regarding leave encashment paid to an NRI overseas and how it should be treated in Form 26AS/Form 16 for tax purposes:

Key points:
You are an NRI during AY 2018-19.
Salary and leave encashment are paid outside India in foreign currency.
LIC of India processes leave encashment and shows it under Section 192 in Form 26AS, but no TDS is deducted.
Your employer treats salary (including leave encashment) paid outside India to NRI as not taxable in India.
Auditor is concerned that showing under Section 192 might trigger a tax demand.
Relevant Provisions:
1. Section 192 - TDS on Salary

This section covers TDS on salary income paid or credited.
Since you are an NRI and salary is earned and paid outside India, this income is not taxable in India under the residential status rules.
Thus, TDS is not applicable and the employer (and LIC) is correct not to deduct TDS.
2. Residential Status & Taxability

As per Section 6 of Income Tax Act, income earned outside India by an NRI is not taxable in India.
Your salary and leave encashment received in foreign bank accounts is not taxable.
3. Leave Encashment Taxability for NRI

Leave encashment is a part of salary income (Section 17(1) of Income Tax Act).
However, if salary is earned and paid outside India to an NRI, it falls outside the scope of taxable income.
There is no separate section for exempting leave encashment — exemption is due to residential status and source of income.
About Form 26AS / Form 16 showing Section 192:
Form 26AS and Form 16 are generated based on TDS statements filed by deductors.
LIC of India files TDS return with section 192 mentioned for salary payment.
Since no tax is deducted, TDS column is zero, but the income is still shown as “salary” under Section 192.
There is no specific alternate section under which leave encashment can be shown for NRI salary income.
What you should do?
No need to change the section code in Form 26AS/Form 16 from Section 192 because it correctly relates to salary income.
The key point is no TDS deducted, and your employer’s treatment is consistent with the law.
To avoid future issues, keep documentation of:
Your NRI status for the relevant year,
Salary/leave encashment paid outside India,
Employer’s letter explaining the tax treatment,
LIC’s TDS return showing zero TDS.
If IT department raises any query, you can explain based on:
Residential status rules,
Foreign salary income exemption,
No TDS deducted as per rules.
If you want formal confirmation, you may request a Ruling or Advance Tax Opinion from the IT department or consult a tax professional.

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