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Leave Encashment Exemption

Rules regarding Leave Encashment Exemption: Treatment of Leave Salary

As per company policy, employees are entitled to accumulate certain types of unavailed leaves. In this post, we deal with Leave Encashment exemption limit in various scenarios.

Leave Encashment during the period of service [Section 10(10AA)]: Fully Taxable

Any leave salary received during the period of service with the same employer is fully taxable. It is applicable to all employees i.e., Government and other employees. However, an employee can claim relief under section 89.

Leave Encashment at the time of retirement or otherwise (includes voluntary retirement on account of resignation):

  • Government Employees (Central and State Government) [Section 10(10AA)(i)]: Leave salary received at the time of retirement is fully exempt for Central and State government employees.
  • Other Employees (including employees of Local authority and Public sector) [Section 10(10AA)(ii)]: Minimum of the following is exempt.
  1. Leave Encashment actually received.
  2. 10 month average salary.
  3. Rs.300000 (Amount specified by the Government). However, this amount is reduced to the extent that has been claimed as exemption in one or more previous years(s).
  4. Cash equivalent of unavailed leave calculated for maximum 30 days leave for every year of service rendered to the same employer.Cash Equivalent is derived on the basis of average salary (average salary is defined below in the Notes).

Notes:

  • Salary includes Dearness Allowance but excludes all other allowances and perquisites.
  • Average salary: Average salary is salary drawn by the employee during 10 months immediately preceding his retirement. For Example: an employee retires on 15th November 2013, the average salary is considered from the period of 16th January 2013 to 15th November 2013.
  • Any government employee who died in harness and his leave salary is received by his family, such leave encashment is not taxable in the hands of the recipient.

 

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