Simplified Laws Guide to Taxation and Legal Concern Meaning :
As per the service rules of the company, an employee is eligible for certain number of days of leave. If a leave is unutilized within a year, either the leave may lapse or it may be encashed or it may be accumulated. The accumulated leave standing in his name may be availed by the employee during his service or as per the rules of the company may even be encashed at the time of retirement or leaving the job.
Leave Encashment while in Service :
Fully Taxable for all categories of employees including Government, Public Sector Undertakings and non-government organizations.
Leave Encashment at the time of retirement for Government Employees :
- Fully exempt from tax u/s 10(10AA)(i)
- Applicable to Employees of Central and State government , but doesn’t include employees of Public Sector Undertaking (PSU) Employees
- Retirement includes voluntary retirement
Leave encashment at the time of retirement for Other Employees :
- Partially exempt from tax u/s 10(10AA)(ii)
- Non-Government Employees such as employee’s private companies including PSU employees, local authorities.
- Retirement includes voluntary retirement (VRS) and resignation. So, Leave encashment received on VRS is partially exempt from tax.
- Leave Encashment amount is exempt to the extent of the minimum of the following (a) Leave encashment actually received OR (b)10 months average salary OR (c) Cash equivalent of leave salary for a maximum of 30 days leave per every year of service (fraction of the year to be ignored) OR (d) Amount specified by the Government Rs.3,00,000
- Salary for this purpose includes Basic and Dearness Allowance (DA).
- Average Salary for this purpose means average salary drawn by the employee during the period of 10 months immediately preceding his retirement
In case of death of the employee :
The amount received by legal heirs is totally exempt from tax.
Earned Leave from different employers :
If the leave encashment is received from more than one employer, the maximum amount of exemption allowed is Rs.300000. So the maximum amount an employee can claim is Rs.3 Lakh during the lifetime.
If you are an employee drawing salary, you may be interested to read below articles
1. Ten things one should know about tax benefit on donations.
2. If I quit my job now how much gratuity can I get?
3. Tax benefit on payment of Housing Loan and Interest on self occupied property
4.Tax benefit on payment of Housing Loan and Interest on let-out property
