Private Sector Leave encashment exemption

Leave Encashment & Section 10(10AA): Leave encashment is fully exempt for government employees.

For non-government employees, the exemption is the least of the following: ₹3,00,000 Actual leave encashment received 10 months’ salary (average of last 10 months)

Cash equivalent of leave balance at the time of retirement Since you resigned from a private sector company, your leave encashment may be partially taxable, depending on the above limits.

 Form 10E Requirement: Form 10E is mandatory if you are claiming relief under Section 89(1) for arrears or advance salary.

If your leave encashment qualifies for exemption under Section 10(10AA), you may not need Form 10E.

 However, if you are claiming relief under Section 89(1), then filing Form 10E is necessary.

Total Income for Previous Year in Form 10E: The form asks for total income of the previous year.

Since you resigned in July 2024, your total income should include all earnings from all sources for the financial year 2024-25, not just from your previous employer.

 If you had income from another employer or other sources after July 2024, you should include that as well.

For private sector employees, leave encashment received at the time of retirement or resignation is partially exempt under Section 10(10AA).

The current exemption limit is Rs 25 lakh (revised from Rs 3 lakh, effective from April 1, 2023). The exempt amount is the LEAST of these four:
1. Rs 25 lakh (lifetime aggregate limit)
2. Actual leave encashment received
3. 10 months of average salary (basic + DA, average of last 10 months before retirement)
4. Cash equivalent of leave balance ,  meaning (earned leave balance in days / 30) x monthly salary

Key points:
- Leave encashment DURING service (not at retirement) is fully taxable for private sector employees
- If you have claimed this exemption in earlier years, the remaining lifetime limit reduces accordingly
- Government employees get a full exemption with no monetary cap
- The Rs 25 lakh cap is a lifetime limit, not per-year ,  track prior claims

For the formula with worked examples and how to enter this in ITR-1 or ITR-2, this [leave encashment tax guide for AY 2026-27](https://taxgarden.in/blog/leave-encashment-tax-rules-section-10-10aa-india-ay-2026-27) covers the calculation step by step.