leave encashment

Encashment of unutilized earned leave at the time of retirement of other employees (not being a Government employee)

Least of the following shall be exempt from tax:

a) Amount actually received
b) Unutilized earned leave* X Average monthly salary
c) 10 months Average Salary**
d) Rs. 3,00,000

*While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each completed year of service rendered to the current employer

**Average salary = Average Salary*** of last 10 months immediately preceding the retirement

***Salary = Basic Pay + DA (to the extent it forms part of retirement benefits) + turnover based commission

“Retirement” includes resignation. What is relevant is retirement: how it took place is immaterial for the purpose of this clause. Therefore, even on resignation, if an employee gets any amount by way of leave encashment, S.10(10AA) would apply. CIT v D.P. Malhotra (1997) 142 CTR 325(Bom), CIT v R.J. Shahney(1986) 159 ITR 160(Mad).