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
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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.