Is Earned Leave Encashment Tax-Free When Resigning? Seeking Clarity on Exemptions

Hi,

I wanted to know whether earned leave encashed at the time of resignation is entirely tax-exempt. Could anyone please give me more information on this.

1. Is there a cap on the amount that is tax-exempt or not?
2. Under what condition is it exempt, e.g., upon termination or resignation or only during final retirement.
3. Under which act is the tax exemption given?

Thanks,

Sudha S.

Hi,

Earned leave encashed is taken into the total income of the employee for the financial year. If the total income, including earned leave encashed, is below the exempted income slab, then no income tax is applicable. If it exceeds the exempted income slab, it is taxable. There is no exemption of income tax on earned leave encashed.

Mohan Rao Manager HR

Dear Sudha S.,

Leave encashment while in service is taxable. Encashment of sick leave is taxable.

Leave encashment received at the time of retirement is fully exempt in the case of Government Servants. In the case of non-Government Employees, leave encashment is exempt to the extent of the least of the following four amounts:

- Rs. 3,00,000/-
- Ten months' average salary;
- Cash equivalent of the leave due at the time of retirement;
- Leave encashment actually received at the time of retirement.

Here, the average salary means the average of the salary drawn during the last ten months before retirement. (source: Income Tax India)

For more details, visit the given site.

Regards,
Pankaj Chandan