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Leave encashment non taxable

Posted in Finance, Income Tax, India.

As per section 10(10AA) of income tax in india, leave encashment amount received by employee by a previous employer in full and final statement, is non-taxable. So If you have changed a job in financial year and received leave encashment for the remaining earned leaves (ELs) Just deduct the amount from total income and compute the income tax on top of that.

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.

In case of other employees, the exemption is to be limited to minimum of all below:
1. The actual amount received
2. The cash equivalent of leave balance (max 30 days per year of service)
3. Maximum of 10 months of leave encashment, based on last 10 months average salary
4. Rs. 3 Lakhs

255 Responses

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  1. Hiren Bavarva says

    hello pankaj sir
    i m completing my graduation before some period
    now i want to pay two year Nil returns so how can i pay
    and what processor i have to do i have no income at now

  2. Aarti says

    Sir, What are the tax exemption rules of leave encashment in of case Board/Corporations of State Govt.? Are the employees considered as State Govt. employees for full exemption of tax on amt recd as leave encashment.

    • Pankaj Batra says

      They won’t be considered as Govt employee.

    • moti ram says

      AFTER 35 year searvice I got retirement on 30/4/15 from HPSEB and observe in SJVNL. I have 300 day leave in my account pl tell me the amount as i get as leavein cashment be exempted or taxable

  3. Sarvesh says

    Can you show an example of how to calculate cash equivalent of leave?

    • Pankaj Batra says

      Lets say total service years: 17. Max non taxable leaves allowed per year = 30. Total leaves max which can be tax free = 17*30 = 510.
      cash equivalent of 510 leaves depends on company policy.
      If company pays only basic salary for leave encashment, then cash equivalent portion = 510 * last drawn daily basic salary.
      If company pays full salary for leave encashment, then cash equivalent portion = 510 * last drawn daily salary.

  4. Sarvesh says

    Thanks sir.

  5. Vishal Mishra says

    Hello Sir,

    I have changed my job couple of month back & my previous employer taken the leave encashment in taxable income on the income statement provided to me for my current employer.

    I have checked and found that Leave Encashment paid to me should be exempt from tax.

    Please advise if I should get my income statement corrected or I can take exemption of the same while filling my income tax return.

    • Pankaj Batra says

      If you can get income statement from previous employer corrected, it would be better.
      Else, you would have to ask for refund while filing income tax return.

  6. Vishal Mishra says

    Thanks Sir,
    I have discussed to change my income statement from my previous employer but they seems reluctant to do so. Please advise where I should make the adjustment of exempted leave encashment while filling the return.

    is this figure needs to be deducted from total taxable income (then figure will be mismatched in return from form 26AS & 16)

    Please advise.


    • Pankaj Batra says

      Yes, you need to deduct amount from total taxable income. Figure would mismatch in form 16, and if a enquiry comes from IT department, you have to reply with your leave encashment exemption statement.

  7. Madhab patnaik says

    I was retired from central bank of india and received rs. 476000/-as leave encashment. Pl clarify whether I shall get full exemption or max amt for rs. 300000/-

  8. Iqbal singh says

    I got retirement on 31/1/15 from bank. I got 5.60 as 8 months’ leave encashment. What about tax?

  9. sameer says

    Dear Pankajji

    I am transferring my money Rs.5 lac to my wife’s account and she open Rs. 5 Lac FD in bank. Also filling form 15G in her name to avoid TDS. and if i showing this money as loan amount to her and showing interest income of Rs. 1000 -3000 in my income while ITR. by this way can i save tax on FD interest income to avoid clubbing of income. Also by this way can i get FD interest tax free?

    • Pankaj Batra says

      I won’t suggest such arrangement, just to avoid tax.
      If IT department catches it, they can demand the extra tax amount and penalty.

  10. Pankaj says

    which form is required to be filled online for claiming relief for leave encashment on retirement.

    • Pankaj Batra says

      As such there is no separate form, you can reduce taxable amount by leave encashment amount.

  11. Cryesh says

    Dear Mr Pankaj,
    I quit a company after working for 80 months (6 years & 8months). Total I am eligible for 180 days during this period and actual leave taken was 88 days only. I was eligible for encashing 7 days max leave during every year, I had encashed about 35 days during my continuity of employment and these leave encashments were offered to tax. As per company policy, max 45 days could be accumulated and eligible for encashment at leaving the company. So 12 days leave lapsed. My last 10 months avg Basic Salary is 250,000. What is my tax exemption on leave encashment.

    • Pankaj Batra says

      The actual amount received, or 3 Lakhs; whichever is lower would be non taxable.

  12. Rajkiran says

    Hi Pankaj,
    i read all the comments here and found that my leave encashment is fully non-taxable just for cofirmation could you reply to my query, Thanks Rajkiran.
    I have regsigned from my comany, they have transfered leave encashment into my account in the end of April-2014 month, other than this all the tax already paid.
    i worked in the company till 31-March-2014
    I have filled the ITR-v assesment 2014-15
    joined new company 2-April-2014 now in assesment year 2015-16

    i see two salried income under form one is prevision company the income show the leave encashment amount.
    other is my new company income.

    tax paid on previous company amount (leave encashment) XXXX Rs. is zero
    tax paid on current company amount XXXX Rs is YYYY Rs.

    should i include leave encashment in my current company income XXXX Rs. amount ??

    • Pankaj Batra says

      Total income needs to be shown in ITR.

      • Rajkiran says

        if i include the Leave encashment than , it will the tax calculation ask me to pay extra tax on this added amount but as this is non-taxable , how can i exclude this leave encashment amount, i did not see any column for leave encashment.

  13. karthik says

    Hi Pankaj,
    Our company was converted into a 100% WOS subsidiary company. Hence we got new offer letter, PF transfer etc. During settlement we got Leave Encashment for 30 days.

    But in the new company as part of Tax project all the Leave Encashment is taken 100% . Should this amount be exempted u/s 10 (10 aa). Can i claim in the IT filing as you had earlier mentioned by reducing the total taxable income ?

    Also we got the Basic + DA + Basket of Allowances. I hope only Basic + DA is exempt . Please clarify.


    • Pankaj Batra says

      This is not an actual resignation, so you should avoid seeking tax exemption for same.

  14. Narayanan says

    My retirement after 35year service 162 days balance for leave encashment is TAXABLE or NON TAXABLE

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