in Finance, Income Tax, India

Leave encashment non taxable

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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278 Comments

  1. 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. 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.

    • @Sarvesh
      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.

  3. 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.

  4. 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.

    Regards,
    Vishal

    • @Vishal
      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.

      • Hi
        Same is the case with me .. My Employer also added LE as taxable salary .. Has anybody got refund from IT in same case ..
        Please reply

        Thanks
        A Sharma

  5. 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/-

  6. 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?

  7. 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.

  8. 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 ??

  9. 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.

    regards
    karthik

  10. Sir ,my father retired after 35 years , he received about 10 lac leave encashment ,I want to know this amount texable or not.

  11. What happens to the 3 lacs exemption when more than one employer involved? Should u declare previous exemption claimed to the current employer to ascertain the balance of leave encashment available?

  12. I have availed leave encashment on 1.1.2016 whether income tax should be deducted from encashment or it can be recovered from my salary spread over to 2016 2017

  13. My employer has mentioned explicitly “leave encasement” is Full & Final Settlement document. But in Form-16 from the same employer, this is not reflecting (it’s clubbed with total income).
    Can I claim for the Leave encasement? Will IT Department ask to have entry in Form 16 as well?

  14. Hi Pankaj,

    I have changed my job in Sep – 2015 & I got around 1.5 lakh amount as leave encashment. My previous company had made this amount as fully taxable and in form 16 they marked Leave Encashment amount as Rs. 0 as they haven’t give me any exception on this amount. I taked to company they are not ready to make any changes in my Form 16 & saying that it should be fully taxable. I have my Full & final Statement from that company that clearly shows leave encashment amount.
    Please suggest how can I claim the leave encashment amount tax exemption.

  15. My dt.of birth 1/9/58 & retirement dt.1/9/16 of state govt service. Whether the leave encashment will be exempted from tax or not. Pl.confirm me. Thanks.