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 organisation may allow you various types of leaves. The labour laws in India mandate certain organisations to allow minimum paid leaves in a year to their employees. However, it is not mandatory for the employees to avail all the leaves in that particular year. Employees may avail such leaves, or in case the leaves are not availed, then such leaves may:

  • either lapse or
  • Carry forward and use/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 in respect of the amount received by an employee as leave encashment either at the time of retirement.

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 least of the following:
    1. (i) INR 3,00,000
    2. (ii) Actual Leave encashment received
    3. (iii) Average salary of last 10 months * 10 months
    4. (iv) Cash equivalent of unavailed leave [unutilised 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

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 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 3,00,000
  • Where leave salary is received in any earlier year from a former employer and again received from another employer in a later year, then the limit of INR 3,00,000 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 use the calculator:

  • Select the assessment year(A.Y.) for which you want your taxes to be calculated
  • (if you earned the leave salary in the year 2020-21, then your A.Y. shall be 2021-22)
  • Select the type of employee depending on the organisation you belong to.
  • Enter the entire amount of leave salary received by you in the given year. However, 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)

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:

  • Amount received as leave encashment
  • The maximum amount stated by the government, i.e. INR 3,00,000
  • The average salary of last 10 months * 10 months
  • Unutilised 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. [State of Bihar vs Md. Adris Ansari (Supreme Court)]


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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. 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). In the case of CIT vs D.P. Malhotra, Hon’ble Bombay High Court held that retirement shall include resignation. Therefore, leave encashment received on resignation 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 unavailed 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 unavailed 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 unavailed 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 different companies and received leave encashment from both these 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 amount of exemption in respect of leave encashment received from both the companies shall not exceed INR 3,00,000.


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

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No, leave encashment received by nominee/legal heir is not taxable.


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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 in the final settlement/ salary certificate or Form No. 16.

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