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Vijay Mohan   19 February 2021

Leave encashment by bank employees

leave encashment at the time retirement by bank employees is fully exempt.

 7 Replies

Online Query

Online Query (CA Final Student)     19 February 2021

Puch rhe ho ya bta rhe ho?
Kapadia Pravin

Kapadia Pravin   19 February 2021

There is a provision of maximum number of days for Leave encashment.
Krishna Chaudhary

Krishna Chaudhary (Accountant)     20 February 2021

Amout is exempted subject to provision of income tax

provisions are

At the time of retirement or resignation, the employee can avail encashment through their accumulated paid leave. However, there are various conditions depending upon the type of organization in which the employee has worked.

When the employee has worked in the central or state government organization, they can fully claim for their paid leave encashment and that too with full exemption from tax.

In the case of employee’s death before the leave encashment, their legal heirs can receive total leave encashment on behalf of the deceased. No income tax will be charged on the amount received by them.

Employees working in the private sector can receive paid leave encashment at the time of retirement or resignation.Maximum tax exemption amount is Rs 3, 00,000 for the leave encashment otherwise amount exceeding this value is taxable. The calculation of exempt leave encashment os as per section 10(10AA)

Tax Exemption Under Section 10(10AA)

In such a case, the following points are considered in order to receive the exemption under section 10(10AA).

The leave encashment amount actually received is taken into account

The average salary of 10 months. The salary includes basic salary and dearness allowances. Also, the commission received is considered. The salary of 10 months actually considered is on the basis of salary received during the 10 months preceding their retirement or resignation.

Even if the employee has accumulated number of leaves in a year, the organization will consider only a maximum of 30 days of leave a year for the encashment process. According to it, the total number of paid leaves will be calculated altogether during the retirement or resignation and then encashment will be processed further. Suppose a person has not utilized all the paid leaves and it accounts for 45 days still the organization will only consider 30 days of paid leave for encashment at the time of resignation or retirement.

In the case of leave encashment during the employment period the amount received will totally be taxable in all forms. But according to Section 89, Income Tax Act, the employee can claim for tax relief from their leave encashment amount.

For employees who have retired after 1998, their leave encashment amount is subjected to a maximum limit of Rs. 3, 00,000 to be received which is specified by the government. When the actual amount to be received will be more than Rs. 3, 00,000, then 3, 00,000 will be received as the encashment amount and the remaining amount will be received in the salary account which will be taxable. This case applies only for non-government employees.

The legal heirs of deceased employees at the time of leave encashment can receive the amount without any form of tax deduction from the amount.

In case of resignation or termination, both government and non-government employees are held to pay the tax on the amount received from paid leave encashment because the amount at the time is considered as income from salary by the income tax department. The rate of tax to be paid is applied same as during income tax on salary.
1 Like
Vijaykumar K

Vijaykumar K   26 August 2021

Under which sec Leave encashment is fully exempted for the Government employees 

satyanarayana buddana

satyanarayana buddana   06 September 2021

I heard that leave encashment by bank employees at the time of retirement is full exempt. Can anyone provide circular no. Or Etc., regarding this

satyanarayana buddana

satyanarayana buddana   06 September 2021

I heard that leave encashment by bank employees at the time of retirement is full exempt. Can anyone provide circular no. Or Etc., regarding this

Dharam Dev Agarwal

Dharam Dev Agarwal   19 October 2021

Is leave encashment taxable or fully exempted from tax for public sector bank i.e State Bank Of India at the time of voluntary retirement completed 35 years service  ? Please reply 




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