Leave Encashment Exemption for Government Employees – Income Tax Rule 10(10AA)

leave encashment

For tax treatment of leave encashment u/s 10(10AA) of Income Tax Act 1961 the employees has been classified into two types :

  1. Government Employees
  2. Non-Government Employees

Government Employees

As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is exempt from tax.

In Simple, any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

Non-Government Employees

In the hands of non-Government employee exemption will be least of the following:

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

Ready Reckoner

Sl. NoLeave encashmentTaxability for Government EmployeesTaxability for Non-Govt Employees
1During period of serviceFully taxableFully taxable
2At the time of retirement or separation (other than on account of Termination)Fully exemptLeave Exemption is least of the following:
1) Rs 3,00,000
2) Leave encashment amount actually received
3) 10 months’ salary (on the basis of average salary of last 10 months ) *
4) Cash equivalent to leave to the credit of employee at time of retirement **
3At the time of termination of employeeFully taxableFully taxable

Leave Encashment Calculator

Check here for Leave Encashment Calculator – Earned Leave & Half Pay Leave for Government Employees

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