Deduction for leave encashment 10AA

If an employee (private employee or non govt) change origination using resignation letter and get leave encashment, is he/she entitled to take exemption.

Replies (3)
Quick Summary
Private employees resigning and receiving leave encashment are eligible for tax exemption under Section 10(10AA), subject to specific limits. These limits include a maximum of £25 lakh, ten times the average monthly salary over the last 10 months, or the actual amount received, whichever is least. For government employees, leave encashment upon retirement is fully exempt. It's crucial to note that the £25 lakh limit is a lifetime aggregate, and exemption is typically applicable upon retirement, resignation, superannuation, or termination, not during service.

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).

Leave a Reply

Your are not logged in . Please login to post replies

Click here to Login / Register  

Company
ARTICLESHIP 28 September 2026
Junior Accountant

J S P M & Associates LLP

Pune

B.Com

View Details
Company
ARTICLESHIP 04 September 2026
Accounts Executive

Hema Yashwanth & Associates

Chennai

B.Com

View Details
Company
ARTICLESHIP 07 September 2026
Article/ Paid Assistant

Murali and Sumeet Chartered Accountant

Bengaluru

CA Foundation

View Details
Company
15 September 2026
Client-site CA associate

Aditya Muley and Co

Mumbai

CA

View Details
Company
30 September 2026
Senior Accountant

Codeboard Technology

Chennai

B.Com

View Details
Company
08 September 2026
Semi-Qualified Assitant

Subrahmanyam & Sivudu CA Firm

Hyderabad

CA Inter

View Details
Company
17 September 2026
Chartered Accountant

Dass Gupta & Associates

Gurgaon

CA

View Details
Company
19 September 2026
Finance Manager

Mugdha Art Studio

Hyderabad

CA

View Details