Deduction for leave encashment 10AA

Yes. A private (non-government) employee who resigns and receives leave encashment is eligible for exemption on the encashment amount under Section 10(10AA) of the Income Tax Act, but the exemption is subject to certain limits.

For non-government employees, leave encashment received at the time of resignation or retirement is eligible for exemption under Section 10(10AA). The exempt amount is the least of the following:

• ₹25 lakh (enhanced limit applicable from May 2023)
• 10 times the average monthly salary of the last 10 months
• Actual leave encashment received
• Cash equivalent of unutilized leave, calculated on the basis of a maximum of 30 days' leave for each completed year of service

For Central and State Government employees, leave encashment received on retirement is fully exempt from tax, and the ₹25 lakh limit does not apply.

It is also important to note that the ₹25 lakh exemption limit is a lifetime aggregate limit. If an employee has already claimed exemption for leave encashment from a previous employer, the balance available exemption will be reduced accordingly.

While calculating the exemption, Dearness Allowance (DA) is included in salary only if the terms of employment provide that DA forms part of retirement benefits.

For detailed calculations and practical examples, you may refer to:

Leave Encashment Tax Exemption Section 10(10AA), formula, limit, and examples for AY 2026-27

The exemption for leave encashement as per Section 10(10AA) is dependent on the employment and the time of receipt of leave.

Leave encashment received while in service is a fully taxable salary.
Exemption under Section 10(10AA) might be available if it is received at the time of retirement, resignation, superannuation, or termination.

Under Section 10(10AA)(i), leave encashment granted on retirement to Government employees is totally exempt. In the case of non-Government employees, the exemption would be on the basis of the lowest of the prescribed amounts in Section 10(10AA)(ii) including the cash equivalent of unavailed leave, the notified monetary ceiling, and 10 months' average salary.

As such, please also confirm when calculating the exemption under Section 10(10AA):

1. On retirement/resignation/termination of service or during service.
2. If the employee is a Government or non-Government employee.
3. The exemption calculation based on the prescribed limits

Also consider relief under Section 89(1).