Leave encashment refers to the money an employee receives in exchange for unused leave days.
Under Section 43B of the IT Act, employers can only claim tax deduction for leave encashment when the payment is actually made to employees.
Such payments cannot be claimed as deductions if it is made after the financial year unless the liability had accrued during that year.
Note: If the leave encashment amount is paid in a later financial year, the deduction is allowed only in that year—not earlier.
Simply setting aside the amount without actual payment doesn't qualify for a tax benefit.
Tax Deduction Timing - employers can only deduct leave encashment expenses from their taxable income in the year they actually pay these amounts to employees.
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