1.What is Leave Encashment?

Leave encashment is the amount payable for the employee’s leave period, depending upon the leaves to his credit and his salary at the time of termination of employment or at the time of encashing his leaves.

2.To whom does Leave Encashment apply?
Status of EmployeeNature of Leave EncashmentTaxability
Government / Non Government employeeLeave encashment during continuity of employmentIt is chargeable to tax. However relief can be taken under Section 89.
Government EmployeeLeave Encashment at time of retiring / leaving job.It is fully exempt from tax under Section 10 (10AA)[i]
Non Government EmployeeLeave Encashment at time of retiring / Leaving jobIt is fully / partially exempt from tax in some cases under Section 10(10AA)[ii]
3.Taxability of Leave Encashment received at the time of retirement – Taxability?

For the purpose of Exemption of accumulated Leave Encashment, employees are divided into two categories:

a. Government Employees (Central and State Government only): Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by a Government employee, is fully exempt from tax.

b. Other Employees : Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by other employees (including employees of Local Authorities and PSU) is exempt to the extent of the minimum of the following amounts :

  • 3,00,000/-
  • Ten month’s average salary (Basic + DA);
  • Cash equivalent of unavailed leave calculated on the basis of average salary of maximum 30 days leave for every year of actual services rendered to the employer from whose service he has retired.
  • Leave encashment actually received at the time of retirement.
4.Conditions for ‘ Leave encashment’

a. If the employee had received leave encashment in any one or more previous year(s) and had availed on the exemption in respect of such amount, then the limit given i.e. Rs. 3,00,000/-, then he shall be reduced by the amount of exemptions(s) availed earlier.

b. The exemption of Leave Encashment can also be claimed in case of resignation by an employee. Section 10(10AA) applies equally to a case of Voluntary on account of resignation.

c. Leave Salary received by a family of a government servant, who died in harness, is not taxable in the hands of the recipients.

d. Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is an ex-gratia payment on compassionate grounds in the nature of gifts. Thus the payment is not in the nature of salary.