Leave Encashment: Taxability on Leave Encashment Salary

The employees working in government and private sector, however, get nearly equal work benefits regarding their pay scale, tax deductions and leaves. Employees having annual salary more than the taxation limit provided the department of income tax are subjected to pay the income tax. Such employees should comply with the guidelines provided and pay their income tax regularly in order to receive other benefits. The government of India has also provided provident fund schemes where certain amount from the monthly salary of an employee gets credited to the Provident fund account. The interest is received on the amount deposited and employee can withdraw the PF savings anytime during their employment or after retirement. The employer also offers incentives and allowances like travel, food, accommodation for the employee during their employment period. There are insurance policies provided by the organization for the employees through which they can claim them during health emergencies and use the matured amount post retirement too.

The employer also provides various types of leave (other than holidays) for the employees. In order to have a good balance between one’s work and personal life the organization offers multiple days of leave for their employees during their work tenure. Besides, the leave is categorised into paid and unpaid leaves. The types of employment leaves are:

• Casual leave – this type of leave is most commonly availed by the employee. This leave can be taken for a maximum of seven days. However it depends on the guidelines provided by the employer for each organization may vary. The employee has to inform the employer about the casual leave to be taken in before and mentioning number of days to take the leave.
• Privilege leave – the employee can take this leave by providing prior information about the leave towards the employer. The leave is paid and is sanctioned by the employer. If this leave is not availed by the employee they can further accumulate them and encash them later. However each organization has their own set of regulations regarding the privilege leaves and their encashment.
• Medical leave – the employee can avail this leave if they are ill and are not be able to work in normal conditions. They have to inform to the employer for availing the leave. The number of medical leaves granted to the employee depends on each organization and such leaves are paid leaves. As this leave is a kind of emergency leave no prior information is mandatory before the leave from employee to the employer. Whereas the employee has to provide a valid medical certificate to the employer if leave is taken for longer days.
• Maternity leave – the maternity leave is availed to the women employees who are pregnant during their employment period. The leave is paid for the period from 12 weeks up to 26 weeks. More extension period is also given by the employer until next 16 months but those leave period is unpaid. During the leave period deductions are not done from the leave salary account.
• Quarantine leave – if there is an outcome of any infectious disease in the family or in the neighbourhood of any employee, then the employee can avail quarantine leave. Granting this leave can help prevent other employees from getting infected through the employee.
• Sabbatical leave – this leave is granted for the employees willing to expand their knowledge by adopting for various relevant institutional courses. They can adopt for any specialized training or workshop which is relevant to their working field and can also take admissions to universities for long term courses. These leaves are paid for a period of time as decided by the organization.
• Half pay leave – this leave can be availed only by the employees working in government organizations. Once the employee completes their one year in the organization they can avail half pay leaves as and when required. In this leave the employee receives half day salary during their leave period.
• Paternity leave – this leave is especially available for the employees who became fathers. However only government employees may avail the benefits of paternal leave in India. The parent employee can be granted 15 days of leave before or after the birth of child. The leave can also be availed till 6 months from the child’s birth.
• Holidays – the holiday leaves are the paid leaves and there no deductions from the salary account of the employees. Holidays include national holidays, festivals and weekly off. Employees working all sectors enjoy these holiday leaves.

Providing such leaves has multiple benefits for employees as well as for organization. In case of any medical emergency or health conditions employees can avail medical leaves which are extendable. Casual leaves help employees to get their personal work done and helps balance both job and personal life. Maternity and paternity leaves are very important and useful working women during their pregnancy. Holidays are the perfect leaves where employees can enjoy festivals and their time with their loved ones. Availing sabbatical or study leaves can really help employees to advance their knowledge levels and skills further adding more flexibility and confidence while working. Organizations to get a lot of benefit from the study leaves as employees trained with new skills and knowledge add more to the organization thus improving business. Paid leaves granted by the organization let employees to balance their work life and create a sense of trust while working with the organization. Organizations have to take care of their employees in all conditions and employees should in return give deliver their best working performance.

Every organization provides working guidelines to their employees based on the regulations of labour law. The labour law gives regulations regarding the terms and conditions of employment, discrimination, employment leave rights, employee representation and employee privacy rights. All organizations working in India should comply with these regulations and provide guidelines to their employees. The regulations set by the labour’s act ease the recruitment process of an employee, their agreements with organization, basic pay scale provided as per minimum wages act and other employee protection guidelines. Rights regarding the leaves for the employee taken during the employment duration should comply with labour act. Therefore organizations should always follow regulations provided in order to secure employee rights.

Leave encashment is a leave carry forward process provided by the organization to the employee. As per the regulations provided by the labour law every organization offers minimum number of paid leaves every year to employee. It depends on the employee whether they want to use these leaves or carry them forward. Thus, organizations provide the ease of carrying forward these unused paid leaves for the next year. As these leaves get credited every year the employee can ask for the encashment at time of their resignation from the company or after retirement. The organization keeps data of the paid leaves used and unused by employee and balances at the end of employment period. The employee can receive a day’s salary for every paid leave day in the encashment process. This process is valid for every employee working the organization.

Any employee demanding leave encashment for their unused paid leaves during their employment period is taxable as it is considered as income from salary. In this case the employee can get tax relief under the section 89. As per section 89 the employee can claim tax relief from the amount received through leave encashment process. In order to get tax relief for leave encashment the employee should fill form 10E. This form is easily available on the e-portal of income tax department and once filled can be submitted online. The only tax be paid during the encashment will be income tax from salary.

At the time of retirement or resignation the employee can avail encashment through their accumulated paid leaves. However there are various conditions depending upon the type of organization in which the employee has worked. When the employee has worked in the central or state government organization they can fully claim for their paid leave encashment and that too with full exemption from tax. In the case of employee’s death before the leave encashment, their legal heirs can receive total leave encashment on behalf of the deceased. No income tax will be charged on the amount received by them. Employees working in private sector can receive paid leave encashment at the time of retirement or resignation. Actually the tax exemption maximum amount is Rs 3,00,000 for the leave encashment otherwise amount exceeding this value is taxable. In such case the following points are considered in order to receive the exemption under section 10(10AA):

• The leave encashment amount actually received is taken into account
• The average salary of 10 months. The salary includes basic salary and dearness allowances. Also the commission received is considered. The salary of 10 months actually considered is on the basis of salary received during 10 months preceding their retirement or resignation.
• Even if the employee has accumulated more number of leaves in a year, the organization will consider only maximum of 30 days of leave a year for the encashment process. According to it the total number of paid leaves will be calculated altogether during the retirement or resignation and then encashment will be processed further. Suppose a person has not utilized all the paid leaves and it accounts for 45 days still the organization will only consider 30 days of paid leave for encashment at the time or resignation or retirement.
• In the case of leave encashment during the employment period the amount received will totally be taxable in all forms. But according to section 89, income tax act the employee can claim for tax relief from their leave encashment amount.
• For employees who have retired after 1998, their leave encashment amount is subjected to maximum limit of Rs. 3,00,000 to be received which is specified by the government. When the actual amount to be received will be more than Rs. 3,00,000 then Rs 3,00,000 will be received as encashment amount and the remaining amount will be received in the salary account which will be taxable. This case applies only for the non-government employees.
• The legal heirs of deceased employees at the time of leave encashment can receive the amount without any form of tax deduction from the amount.
• In case of resignation or termination both government and non-government employees are held to pay the tax on the amount received from paid leave encashment. Because the amount at the time is considered as income from salary by the income tax department. The rate of tax to be paid is applied same as during income tax on salary.

Altogether, the paid leave encashment is undoubtedly a beneficial provision by the government for the employees. The employees working in all types of organizations receive the same benefit from the leave encashment. Subsequently getting leaves for an employee during their employment time is an integral part of their work lifetime. Their lives get divided into work and personal life during their employment period. They need to cover both these to be able to give the best of their time to both. Thus, in order to ease these things the government has provided labour act according to which the employees get equal rights for their leaves and wages. And, when the employees don’t take their allotted paid leaves, they can get them converted into money at the end of their employment. This encashment amount can further be useful for emergency purposes like healthcare. This amount can also be positively invested into various funds, policies, insurances and shares. After retirement the employee can peacefully utilize this encashment amount for their personal purposes and secure the family financially.