Taxability and tds on leave encashment
This query is : Resolved
02 July 2014
Dear All,
We are facing a peculiar problem while deducting tds on payment of Leave Encashment at the time of retirement.
The first question is when the leave encashment accrues to the employee for assessing taxability of the same?
For ex- If Mr. A is retiring on 31st March,2014 whether Income of Leave encashment will accrue on 31st March,2014(on the last day of service)(in the F.Y. 2013-14) or on 1st April,2014 (on the first day after retirement) (In the F.Y. 2014-15). Mostly it is paid after two or days of retirement.
Second issue us when tax on the same will be deducted?.
We are facing a peculiar problem while deducting tds on payment of Leave Encashment at the time of retirement.
The first question is when the leave encashment accrues to the employee for assessing taxability of the same?
For ex- If Mr. A is retiring on 31st March,2014 whether Income of Leave encashment will accrue on 31st March,2014(on the last day of service)(in the F.Y. 2013-14) or on 1st April,2014 (on the first day after retirement) (In the F.Y. 2014-15). Mostly it is paid after two or days of retirement.
Second issue us when tax on the same will be deducted?.
05 July 2014
Kindly give any suggestions
06 July 2014
Kindly send me your suggestion
26 July 2025
Great question! Leave encashment taxability and TDS timing at retirement can be a bit tricky. Here's a clear explanation:
---
### 1. **When does leave encashment income *accrue*?**
* **Income from leave encashment is considered to accrue when the employee **retires or leaves service** — that is the point when the right to receive the amount becomes certain.**
* So, in your example:
Mr. A retires on **31st March 2014**. The income **accrues on 31st March 2014**, i.e., during **FY 2013-14**.
* Even if the payment is made after retirement (say in April 2014, FY 2014-15), the **taxable event is retirement date**, not payment date.
---
### 2. **Taxability under Income Tax Act**
* Leave encashment on retirement is taxable under **“Salaries”** head.
* However, there is **exemption under Section 10(10AA)** for **leave encashment received at retirement from employer**, subject to limits.
---
### 3. **When should TDS be deducted?**
* TDS should be deducted **at the time of payment**, irrespective of when the income accrued.
* So if the payment is made after retirement (say in April 2014), **TDS should be deducted in FY 2014-15** on the amount paid.
* But for **income declaration and filing returns, the employee must declare it for FY 2013-14** because income accrued in that year.
---
### 4. **Practical impact**
| Event | Accrual of Income (for Income Tax) | TDS Deduction Time |
| ------------------------------- | ---------------------------------- | ---------------------------------------------- |
| Retirement date (31 March 2014) | FY 2013-14 | Payment date (say April 2014) i.e., FY 2014-15 |
* Employer may deduct TDS in FY 2014-15 but employee needs to report income in FY 2013-14 return.
---
### 5. **References**
* Section 5(1) and Section 10(10AA) of Income Tax Act
* CBDT Circulars and judicial pronouncements (e.g., CIT vs. Shyam Sunder Kapoor)
* CBDT instructions on TDS deduction on leave encashment
---
If you want, I can help you draft a TDS calculation example or suggest the appropriate TDS section and rates.
Would you like that?
---
### 1. **When does leave encashment income *accrue*?**
* **Income from leave encashment is considered to accrue when the employee **retires or leaves service** — that is the point when the right to receive the amount becomes certain.**
* So, in your example:
Mr. A retires on **31st March 2014**. The income **accrues on 31st March 2014**, i.e., during **FY 2013-14**.
* Even if the payment is made after retirement (say in April 2014, FY 2014-15), the **taxable event is retirement date**, not payment date.
---
### 2. **Taxability under Income Tax Act**
* Leave encashment on retirement is taxable under **“Salaries”** head.
* However, there is **exemption under Section 10(10AA)** for **leave encashment received at retirement from employer**, subject to limits.
---
### 3. **When should TDS be deducted?**
* TDS should be deducted **at the time of payment**, irrespective of when the income accrued.
* So if the payment is made after retirement (say in April 2014), **TDS should be deducted in FY 2014-15** on the amount paid.
* But for **income declaration and filing returns, the employee must declare it for FY 2013-14** because income accrued in that year.
---
### 4. **Practical impact**
| Event | Accrual of Income (for Income Tax) | TDS Deduction Time |
| ------------------------------- | ---------------------------------- | ---------------------------------------------- |
| Retirement date (31 March 2014) | FY 2013-14 | Payment date (say April 2014) i.e., FY 2014-15 |
* Employer may deduct TDS in FY 2014-15 but employee needs to report income in FY 2013-14 return.
---
### 5. **References**
* Section 5(1) and Section 10(10AA) of Income Tax Act
* CBDT Circulars and judicial pronouncements (e.g., CIT vs. Shyam Sunder Kapoor)
* CBDT instructions on TDS deduction on leave encashment
---
If you want, I can help you draft a TDS calculation example or suggest the appropriate TDS section and rates.
Would you like that?
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