Leave salary received at the time of retirement/ leaving job

Leave salary received during previous year (before retirement)

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Leave salary/ leave encashment calculator

Your employing organization may allow you various types of leaves. The labor laws in India mandate certain organizations to allow minimum paid leaves in a year to their employees. However, the employees don't need to avail of all the leaves in that particular year. Employees may avail such leaves, or in case the leaves are not availed, then such leaves may:

  • Lapse
  • Carried forward and used/accumulated for the future or
  • Encashed each year or at the time of retirement/resignation.

Such options vary from employer to employer. The payment received on encashment of leaves not availed would form part of the salary. However, section 10(10AA) of the Income-tax Act provides an exemption regarding the amount received by an employee as leave encashment

Tax exemption for leave salary or leave encashment

Leave encashment received while in service or at the time of termination.

There is no exemption if an employee encashes leaves while he is still in service or at the time of termination (other than on account of retirement). Therefore, the entire amount received shall be taxable. Note that relief under section 89 is available in such a case.

Leave encashment received at the time of your retirement, whether by way of superannuation or otherwise
  • Government employees: Leave salary received at the time of retirement is fully exempt from tax.
  • Non-government employees: Leave salary received at the time of retirement is exempt from tax to the extent of the least of the following:
    1. INR 25,00,000
    2. Actual Leave encashment received
    3. Average salary of last 10 months * 10 months
    4. Cash equivalent of not availed leave [unutilized leave in months (considering maximum 30 days leave per year) * Average salary of last 10 months]

Here, unutilized leave = Leave allowed (no. of years of service *30) - Leave taken

Notes:
  • Salary for computing exemption means basic salary + dearness allowance (in terms of employment for retirement benefits) + commission expressed as a fixed percentage of turnover.
  • If you receive a leave salary from more than one employer in the same financial year, then the total amount of leave salary exempt from tax cannot exceed INR 25,00,000
  • Where leave salary is received in any earlier year from a former employer and again received from another employer in a later year. The limit of INR 3,00,000 25,00,000 will be reduced by the amount that was exempted earlier.

You may use a taxable leave salary calculator to compute your tax on leave encashment received.

How to calculate leave encashment exemption:

  • Select the assessment year(A.Y.) for which you want your taxes to be calculated
  • (if you earned the leave salary in the year 2022-23, then your A.Y. shall be 2023-24)
  • Select the type of employee depending on the organization you belong to.
  • Enter the entire leave salary you received in the given year. However, the leave salary received during retirement must be entered in the last box.
  • Enter your employment period in years. Any fraction in months should be ignored. You may also compute the same by clicking on calculate. You will be required to enter your joining date and date of termination of service.
  • Next, key in your last 10 months' salary and enter the average of that in the next box.
  • Enter the number of days of leaves you were entitled to during your entire service period
  • Enter the number of days of leaves availed/encashed during your entire employment period.
  • Now enter the leave salary if it was exempted during any earlier years. Following these steps will provide you with your exempted and taxable leave salary.
    Note: Please enter '0' where any field does not apply to you. (the final answer doesn't change in the calculator)

Leave encashment formula

The leave encashment formula is [(Basic Salary + Dearness Allowance) / 30] * Number of EL or earned leaves.

Frequently Asked Questions

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How is leave encashment computed?

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Leave encashment received by government employees are exempt from tax. However, leave encashment received by other than government employees i.e., private employees are tax-free to the least of the following:

  • The amount received as leave encashment
  • The maximum amount stated by the government, i.e., INR 25,00,000.
  • The average salary of the last 10 months
  • Unutilized leave in months (considering maximum 30 days leave per year) * Average salary of last 10 months

    Here, unutilised leave = Leave allowed (no. of years of service *30) - Leave taken


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Can the leave encashment be withheld?

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Leave encashment can be withheld if any criminal case or any departmental proceedings are pending against any employee at the time of retirement.


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Will leave encashment be subject to tax at the time of resignation?

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Leave encashment received on resignation is subject to tax. However, leave encashment received by government employees is fully exempt from tax when received on retirement. In the case of private employees, a certain portion of leave encashment received on retirement (whether due to superannuation or otherwise) is exempt under section 10(10AA). Therefore, leave encashment received on retirement shall be eligible for exemption under section 10(10AA).


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What is leave encashment?

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Leave encashment is a component of salary that is received on the conversion of not availed leaves into cash.


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What is the maximum number of leaves that an employee can encash?

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Any number of not-available leaves can be encashed by an employee based on the number of leaves allowed to him by his employer as per the employment policy. However, a cash equivalent of a maximum of 30 days of not availed leaves is exempt as per the Income-tax act.


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Can casual leaves, sick leaves, etc., be encashed?

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Encashment of leaves depends on the employment policy of your company. If it is allowed as per the policy, it can be encashed.


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Suppose I have claimed an exemption of INR 1,00,000 during an earlier year. Will I still be eligible for exemption under section 10(10AA)?

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Yes, you can claim the exemption under section 10(10AA) any number of times. However, the total exemption cannot exceed INR 3,00,000. Therefore, you may claim the remaining exemption of INR 2,00,000 in the following years.


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I have worked in two companies and received leave encashment from both companies. Can I claim an exemption of INR 3,00,000 each in both these cases?

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The exemption under section 10(10AA) shall be restricted to INR 3,00,000. Therefore, the exemption amount for leave encashment received from both companies shall not exceed INR 3,00,000.


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Is leave encashment received by the nominee/legal heir in case of the employee's death taxable?

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No, leave encashment received by a nominee/legal heir is not taxable i.e. it is fully tax exempt.


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Where can I find the details of my leave encashment received?

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You can find details of your leave encashment received in the final settlement/ salary certificate or Form No. 16.

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Is leave encashment claimed as tax-exempt?

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If you work for the central or state governments, you don’t have to pay any tax on the leave encashment amount you receive on retirement, no matter how much it is or what conditions apply. Leave encashment is tax-free when you retire from your job. But this benefit is only available if you get it when you retire from your job, not if you cash it in while you are still working.

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What is the exemption for Section 10AA?

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This existing section allows you to claim a tax deduction on your export profit as follows: For the first 5 consecutive years, you can deduct 100% of your export profit from your taxable income. For the next 5 years, you can deduct 50% of your export profit from your taxable income.

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Is Leave encashment taxable?

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Leave encashment in India is generally taxable. However, the eave encashment exemption calculation depends on various factors including whether the leave encashment is received by a government employee or an employee in the private sector, as well as the provisions of the Income Tax Act. Here's a basic overview:

  • Government Employees: Leave encashment for government employees is usually fully exempt from income tax in India. However, there might be some exceptions, so it's essential to check the specific rules and regulations.
  • Private Sector Employees: For employees in the private sector, leave encashment is taxable to the extent that it is not exempt. According to Section 10(10AA) of the Income Tax Act, leave encashment received by non-government employees can be exempt up to a certain limit. The exemption limit is the least of the following:
    1. Actual leave encashment received.
    2. 10 months' average salary immediately preceding retirement.
    3. Cash equivalent of leave earned but not availed.

The exemption under Section 10(10AA) is available upon retirement or resignation, and not when leave is availed during employment.

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Is leave encashment taxable on retirement?

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Leave encashment on retirement is subject to taxation in India. However, there is a provision in the Income Tax Act that provides an exemption under certain conditions. The exemption for leave encashment on retirement is covered under Section 10(10AA) of the Income Tax Act.

According to this section, leave encashment on retirement can be exempt from income tax up to the least of the following three amounts:

  • The actual leave encashment received.
  • 10 months' average salary immediately preceding retirement.
  • Cash equivalent of leave earned but not availed.

It's important to note that this exemption is applicable upon retirement or resignation and not when leave is encashed during active employment. The exemption is subject to the specified limits and conditions laid out in the Income Tax Act.

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