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
Hi,
I am a retired from Nationalized Bank Services. Can you please let me know tax liabilty on Leave Enchashment on Retirement.
Thanks in advance.
@M R Chalapathi
The exemption on leave encashment 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
HI Pankaj
I had a leave encashment of 85751 in my full and final settlement. In my Form 16 of the previous company – they have just taken 39476 as the tax exempted amount u/s 10. Is this correct.
Pls mail me response at .
I will be very thankful.
@Rohan
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
Please compute this and see if 39476 has been correctly marked as non taxable. If not, you can claim for full amount while ITR filing.
Thanks, Understood. Just to confirm below –
I have worked in Oracle for exactly 4 years till june 3, 2011. In my full and final settlement, I had 34 days of leave encashment with value of Rs. 85000 approx. In my form 16, they have considered only 39476 as exempt from tax
By the rules above I should have all money as taxfree and they have put the remaining as taxable part increasing my tax payable by more than 10,000 rupees.
@Rohan
We are not sure how they came to figure of Rs 39476. You should ask your ex-employer Oracle on non-taxable computation details.
@Rohan
There is an update:
The clause “The cash equivalent of leave balance” is explained as: = Period of earned leave (in number of months) to the credit of the employee at the time of leaving the job (or) resignation X Average monthly salary.
Average monthly salary = Basic salary + Dearness Allowance
Hi Pankaj,
My previous company paid me leave encashment on the basis of gross salary i.e they calculated the amount by multiplying no. of leave days * (gross salary for one day). Now, will the whole amount get exempted or only the basic part calculated as no. of leave days * (basic salary for one day).
@Pankaj
Whole amount would be exempted, subject to maximum exemption limits.
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
If i purchase a flat in the name of my wife , and pay the loan from my salary will i get benefit of interest and principal amount paid during the financial year.
@M.Das
Flat should be in your name in order to get tax benefit for loan interest and principal payments.
i am in employment since 9 years getting leave salary of 88 days what will be calcilation kindly help me in working out
@Shobhana
In case you are not government employee, maximum amount of Rs 3 lakh would be non taxable in case leave encashment amount is more than 3 lakh. Else whole amount would be non taxable.
This is only valid on leaving job from this employer. If payment is made while in service, amount would be taxable.
I know that if you leave company that time leave en-cashment is not taxable.
My company is acquired and company is giving maximum 30days leave en-cashment.
So in this case leave en-cashment is taxable or not?
Please let me know.
@Vicky
If company is acquired and you join new parent company (by resigning from first and joining second), leave encashment would be non-taxable.
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.
Can you please confirm that a person serving in an Central Autonomous which is funded by Government (its expenditures are met through budget grant given by GoI) should be treated as Government Employee for the above rebate or not? The employee is governed by the pay-rules of GoI and Leave encashment is done on the basis of GoI rules which are applicable for Central Government Employees.
@Ravindra
This rule is strictly for Govt employees. If your job is considered a Govt job, then these rule will apply else not.
My earlier query which is as follows is still un-answered;-
For leave encashment exemption, will an employee of an Central Government Autonomous body which is funded by Governded of India through budgetory support (i.e. salary of employees and other expenditures are met from Grant received as budget from Government of India ub Non-Plan) should be treated as Government Employee or not for total exemption from Income Tax at the time of retirement. Employee get salary and other allowences as per the 6th Pay commission of Central Government
how can i use this calculator..
In FY 2011-2012, I’ve enjoyed the exemption benefit of Rs. 3,00,000/- under section 10, as you have mentioned above. I now want to e-file tax return, but I’m unsure which ITR form I’m supposed to fill. Can you help me with ITR form that I should be filling.
I’m retired, and I’m receiving pension from BMC. I’ve no other source of income.
Thanks
@Kailash
You should file returns with ITR1 form.
Thanks for your response.
I guess I need to deduct 3 lakhs from total taxable income, and declare that as income for the financial year in point 1 of ITR 1.
@KN
Yes, you are correct.
I got leave encashment in previous year in my final dues settlement. But my previous employer has deducted income tax on it. Form 16 section 10 also does not include Leave encashment. Can I still claim tax rebate while filing my income tax return.
Thanks…
@Aparna
You should reduce taxable income by deduction amount and file returns.
In case IT department sends query later for explanation, send full and final statement as proof.
Thanks a lot Pankaj…
Hi Pankaj,
Thanks for the clear article.
I worked in a company from 22.12.2008 to 27.5.2011.
My basic salary was ~Rs. 25000.
My monthly take home salary (including all the allowance) was ~Rs. 76,000.
When I resigned from the company, I had 37.5 days leave.
I got Rs. 1,29,635 while encashing the leave, calculated by the following formula.
Rs. 129635 (i.e.) 76012/ 22 x 37.52 = Rs. 1, 29, 635/)
But, the tax exemption under section 10 A seems to be calculated wrongly for this.
They gave me tax exemption only for Rs. 29,868 for this leave encashment.
In particular, (2) the cash equivalent of leave balance seems to be calculated on my basic salary/month instead of my net salary/month.
In the least of the 4 factors,
1. The actual amount received is : Rs. 129635 (i.e.) 76012/ 22 x 37.52 = Rs. 1, 29, 635/)
2. The cash equivalent of leave balance : (25,000 / 30) x 37.5 ~= Rs. 29,868
3. Maximum of 10 months of leave encashment, based on last 10 months average salary : Rs. 7 lakh
4. Rs. 3 lakh
Can I file tax exemption for entire Rs. 1,29,635 in my final returns.
Thanks,
Saravanan
@Saravanan
As employer has only provided tax exemption on basis of basic salary (which was small and less than one third of monthly salary), I suggest you to file tax exemption for remaining amount too. As amount is huge, tax refund would be big amount and you can fight over it.
There is a chance that income tax department send you query to explain this before processing refund. At that time, take help from an experienced CA and present your case.
Thanks a lot Pankaj !
Hi Pankaj,
I checked with another tax consultant here. And, looks like the company exempted the right amount.
He showed me an example case from the book, ‘Tax mann’s direct taxes (law & practice)’ by Dr. Vinod.K.Singhania & Dr. Kapil Singhania.
”
…….
This clause ‘2. The cash equivalent of leave balance :’ is explained as,
= Period of earned leave (in number of months) to the credit of the employee at the time of leaving the job (or) resignation X Average monthly salary.
How to find Average monthly salary? Salary, for this purpose, means basic salary and includes Dearness Allowance if terms of employment so provide.
It also includes commission based upon fixed percentage of turnover achieved by employee.
Average salary is calculated over last 10 months salary average.
….
”
My salary contains, ‘Basic , HRA, Conveyance Allowance, Special Allowance’ components. Not sure why only Dearness Allowance is considered.
Thanks.
@Saravanan
Thanks for the update.
Tax laws are so complex and hard to understand. This section on income tax website states “calculated on the basis of the average salary drawn by the employee during the period of ten months”. Now its for us to understand what is average salary here.
BTW, I am also an IT professional like you and not a tax professional/CA by qualification. Its my interests which have taken me onto this path 🙂
No problem Pankaj. 🙂
Appreciate your initiative.
Keep it up.
i had availed 7 months throughout my the service and en-cashed 4 months leave.Does it mean my total availed leave is 7+4=11 months???
@ACis
Availed leaves would be 7 months.
Hi Pankaj,
Thanks for the detailed information.
I would like to ask certain questions from Company’s perspective.
As per second proviso to Section 10(10AA)(ii), aggregate amount of leave encashment received in earlier years which has claimed to be exempt should not exceed the limit prescribed.
So in this case, at the time of F&F settlement of any employee, how the Company should cross check the amount of leave encashment which the employee has already claimed to be exempt in earlier years?
In absence of any information/ documents with regards to earlier exemptions, is this correct to deduct tax on whole amt of leave encashment paid by the Company?
What are the overall responsibilities/ risks from Company’s side while paying leave encashment at the time of F&F settlement?
@Vrushali
Its not the company responsibility to assess and cross check earlier deduction taken.
Company may take any of the below stands:
1. Just consider full amount taxable and if any exemption is to be taken, employee can take himself in ITR filing.
2. Compute the leave encashment exemption amount on basis of only current payment by company and deduct tax accordingly on amount.
for leave encashment, per day salary is calculated as calendar day salary (gross_yearly_salary/365) or it should be based on no of working days ( (gross_yearly_salary/240 ; considering 5 working day week)?
@Manish
It would be (monthly basic salary+dearness allowance)/30
encashment of earn leave at the time of LTC is tax exemted ?
@Damji
Did not understood your question. Can you please explain it further.
I gone in LTC in Dec-12 and 10 days leave encashed. This leave encashed amount will be consider in tax ?
@Damji
Amount received for Leave encashed while in service is fully taxable.
Vol. Retirement from PSU Co. & Leave Encashment received above 3 lacs. Whether fully exempted or taxable above 3 lacs ? (PSU Co is under Govt of India Enterprise)
@S G Ambekar
As you were not state or central government employee, amount exceeding Rs 3 lakh would be taxable.
Vol. Retirement from PSU Co. & Leave Encashment received above 3 lacs in FY 12-13 ( VR on 31/12/12) and the same changed a job and joined in FY 12-13 (Joined on 1/1/13), whether fully exempted or taxable above 3 lacs ? (PSU Co is under Govt of India undertaking)
@SG Ambekar
Amount exceeding Rs 3 lakh would be taxable.
I am employed in ONGC, a Govt of India enterprise.
I intend to opt for VRS
Whether leave encashment for around 300 days coming to Rs. 11.0 lacs is taxable.
Besides that around 4 to 5 lacs, I am going to get against my balance HPL i.e. Medical leave type, what would be the tax liability in this case.
@Ashok
Only amount upto Rs 3 lakhs would be non-taxable, amount above it would be added to taxable income.
Hi Pankaj
Can you please guide me how to show the leave encashment while full and final settlement as exemption in income tax vide section 10AA in ITR? Is there any declaration column available in ITR form for section 10AA for employees or we just have to deduct the same from gross taxable salary?
@Jaykumar
There is no special field for 10AA in ITR. You just need to reduce taxable income by exempted amount and file returns.