Employers usually have a Leave Encashment policy – some may allow you to carry forward a certain type of leaves and allow you to encash them while others may prefer you take your leaves as you go or else these may lapse on a fixed date. Do find out your employer’s leave encashment policy, so you can make the most of them!
Any amount received in lieu of leaves accumulated is referred to as Leave Encashment and is taxed under the head ‘Income from Salary’.
Under the Income Tax Act section 10(10AA), Leave Encashment is exempt to a certain extent.
- In case of a Central Government or State Government employee – any amount received as leave encashment is exempt from tax
In case of a Non-Government employee – The least of the following is exempt from the total leave encashment received –
- 10 months average salary. Where average salary means the salary of 10 months immediately preceding the retirement or resignation. Salary means basic salary and DA, excludes all allowances and perquisites.
- Leave encashment actually received
- Amount equal to salary for the period of leave earned (leave earned not to exceed 30 days for every year of actual service)
- Rs 3,00,000 – Maximum amount specified by Government
The amount chargeable to tax shall be Total Leave Encashment received less exemption calculated above = amount to be added to Income from Salary (and taxed on the basis of applicable tax slabs).
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