Is Leave Encashment Taxable? Let's Discuss the Tax Implications Together

Is leave encashment taxable?

Regards,
Asmita

Leave Encashment Taxability

Leave encashment is non-taxable at the time of leaving service only. If it's paid in the middle of employment, it will be taxable.

Regards,
Supriya

Dear Supriya, Leave encashment is not taxable at the time of leaving service; it is a matter of dispute. Generally, the Income Tax Department ensures that leave encashment is exempt only if it is received at the time of retirement. Section 10(10AA) of the IT Act states that leave encashment is not taxable "on retirement or otherwise." The catchword here is 'otherwise,' which suggests that there are certain exemptions in the case of a person leaving their job for reasons other than retirement. There are judgments of High Courts which confirm that leave encashment is not taxable at the time of resignation as well.

In most private organizations, tax is deducted on leave encashment at the time of resignation. Employees have the option to file a tax return and claim the refund.

Regards, Kamal

Dear Asmita Ji,

Leave encashment during the service period is taxable. However, it is not taxable when received at the time of superannuation, retirement, or termination of service. If you leave one job and take up another and receive leave encashment from your former employment, it is not considered taxable income.

Regards

Hi all, thank you all for your prompt response to the post. In my company, the accounts department states that leave encashment is taxable at the time of resignation.

Regards

Leave Encashment and Taxation

Generally, the Income Tax Department ensures that leave encashment is exempt only if it is received at the time of retirement. So, if an employee is still in service, then it is taxable.

Regards,
Prakash