Tax calculation for leave encashment

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Jatin Bansal (Querist)
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21 July 2012 Dear Sir,

I left my job on 27th September 2011.

I had a basic pay per month of rs 44791/- and GA of Rs. 26279/-, and leave balance of 60 days. So, I had received the a sum of Rs. 237397/- as leave encashment. I had worked for more than 6 years in that organization

As per the income tax law, following are the rules that are used to calculate the tax exemption on leaves encashment:

Least of the following amounts will be exempted from tax:

# Cash equivalent of the leave salary in respect of the period of earned leave to the credit of employee at the time to retirement/superannuation (earned leave entitlements cannot exceed 30 days for every year of actual service), or

# 10 months’ ‘average salary’, or

# Rs 3 lakh (applicable from 1.4.98)

# The amount of leave encashment actually received at the time of retirement.

I am not able to understand the first part of the rule. From some other forum, instead of first rule it mentioned " Latest Basic / 30 * No. of leave balances.". Are they same?

So if I calculate it based on this new rule, I am eligible for tax benefit of 44791/30 * 60 = 89582/-. Is this correct?

But then if I consider leave encashment calculations, "(Basic+GA)/21 * no of leaves encashed" here 21 is the number of working days in my organization in a month. So shouldn't the tax benefit also be calculated based on this 21 days instead of 30 days. i.e. 44791/21*60=127920/-. Please confirm.

Thanks
Jatin Bansal

Amol S Joglekar

Amol S Joglekar (Expert)
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21 July 2012 What is GA? I hope it is not DA. Leave encashment received in most cases is cash equivalent. Do not get confused with 21 or 30. The postulate will be clear if you study the LEAVE encashment rules in GOVT. Mind you leave encashment by GOVT employees is fully exempt. WHY? Because GOVT does not pay more than average 10 months, cash equivalent and basic + DA.

Jatin Bansal

Jatin Bansal (Querist)
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21 July 2012 Thanks Mr Joglekar for replying to my query.

GA is General Allowance, basically an additional income which is not constituted in calculating PF etc.

I did consulted my last employers Finance guy and he mentioned that I would be only eligible for a deduction of Rs 89582/-. But I am not convinced, and didnt even found any satisfactory answer on net, thats why I had posted this query to experts like you.

Thanks
Jatin