MINISTRY OF FINANCE
(Department of Revenue)
(CENTRAL BOARD OF DIRECT TAXES)
NOTIFICATION
New Delhi, the 24th May, 2023
(INCOME-TAX)

S.O. 2276(E).—In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs. 25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise.

2. This notification shall be deemed to have come into force with effect from the 1st day of April, 2023.

[Notification No. 31/2023/F. No. 200/3/2023-ITA-I]

SOURABH JAIN, Under Secy.
Explanatory Memorandum : It is hereby certified that no person is being adversely affected by giving
retrospective effect to this notification

Download Click here

Leave Encashment Income Tax Treatment / Taxation of Leave Encashment

Why Leave Encashment is taxable

: As per Section 17(1) of Income Tax Act  :

• (1) “salary” includes—
• ……

  —-

• (va) any payment received by an employee in respect of any period of leave not availed of by him;

When Leave Encashment is not taxable 

 Section 10(10AA) of the Income-tax Act, 1961, provides for exemption of the amount received by an assessee by way of leave encashment, under certain conditions and to a certain extent.

• Any leave encashment received by an employee of the Central Government or a State Government at the time of his retirement whether on superannuation or otherwise is totally exempt.
• Any leave encashment received by a non-Government employee at the time of his retirement whether on superannuation  or otherwise  will be exempt up to Lower of following
  • A maximum of 10 months’ average salary drawn by the employee during the period of ten months immediately preceding his retirement  whether on superannuation or otherwise .
• Monetary limit that the Central Government may prescribe for this purpose. (The present limit prescribed by the Government is Rs. 300000 which is the maximum admissible to a Central Government employee)

 Note:- the entitlement to earned leave of an employee shall not exceed 30 days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

How to calculate Exemption of Leave Encashment

Mr. X, a senior executive in a private company, retired from service after putting in 25 years of service. He was entitled to earn leave during service at the rate of 40 days for every completed year of service. He actually availed earned leave for 600 days while in service, and encashed the balance of 400 days at the time of retirement. He received leave encashment

Leave Encashment 400 Days

Salary Last  Drawn Rs 34900

A. He received leave encashment for 30 days of Every year= 400 *34900/30 = Rs 465333

B. Average Salary of Last 10 months before retirement / resignation.

AVG.SALARY(BASIC+DA+FDA)FOR 10 MONTHS PRECEDING OF SEPERATION. = Rs 314000

C. Maximum Exemption Limit Rs 300000

Taxable Leave Encahment Rs 465333 – 300000 = Rs  165333/-

Is leave encashment is taxable at the resignation?

Refer Tax benefit of Leave Encasement is available in case of resignation also

Leave Encashment Exemption : Section 10AA of Income Tax Act

Incomes not included in total income.

10 .In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

(10AA)   (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement  ¹[whether] on superannuation or otherwise ;

(ii)    any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement  ¹[whether]  on superannuation  or otherwise as does not exceed  ²[ten] months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement  ¹[whether] on superannuation or otherwise, ³[subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit⁴ applicable in this behalf to the employees of that Government]

                      Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause  ⁵[shall not exceed the limit so specified]

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause   ⁶[shall not exceed the limit so specified], as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

⁷[***]

Explanation.—For the purposes of sub-clause (ii),—

⁸[***] the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

⁹[***]

Notes

1. Inserted by the Taxation Laws (Amendment) Act, 1984, w.r.e.f. 1-4-1978.
2. Substituted for “eight” by the Finance Act, 1999, w.r.e.f. 1-4-1998. Earlier, “eight” was substituted for “six” by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.
3. Substituted for “or thirty thousand rupees, whichever is less” by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.
4.  Specified exemption limit applicable in relation to employees who retire, whether on superannuation or otherwise, after 1-4-1998 : Rs. 3,00,000 – Notification No. SO 588(E), dated 31-5-2002. For details, see Taxmann’s Master Guide to Income-tax Act.
5. Substituted for “shall not exceed thirty thousand rupees” by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.
6.  Substituted by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.
7. Third and fourth provisos omitted by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986. Prior to their omission, the third and fourth provisos were amended by the Taxation Laws (Amendment) Act, 1984, w.r.e.f. 1-4-1978.
8. “(i)” omitted by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.
9. Clause (ii) omitted by the Direct Tax Laws (Amendment) Act, 1987, w.r.e.f. 1-7-1986.

Also refer Income Tax website Click here

Leave Encashment Income Tax ,is leave encashment taxable on resignation,leave encashment on retirement calculations,income tax on leave encashment on resignation,leave encashment calculation in india,leave encashment exemption under sec 10(10aa),leave encashment meaning,leave encashment exemption limit for ay 2017-18,leave encashment rules

It is taxable if received while in service.

As per Section 17(1) of Income Tax Act  :

(1) “salary” includes—

—-

(va) any payment received by an employee in respect of any period of leave not availed of by him;

Leave encashment received at the time of retirement is exempt in the hands of the Government employee.

In the hands of non-Government employee leave encashment will be exempt subject to the limit prescribed in this behalf under the Income-tax Law.​

[Specified Maximum exemption limit applicable in relation to employees who retire, whether on superannuation or otherwise, after 1-4-1998 : Rs. 3,00,000 – Notification No. SO 588(E), dated 31-5-2002]

[ Section 10(10AA ) of Income tax Act ]

Related Post

Income Tax Books

Income Tax Press Release

Income Tax Act 1961

Income Tax Forms

Income Tax Rules 1962

Income Tax Notifications

Income Tax Circulars

Income Tax Instructions

Income Tax Office Memorandum

Income Tax Judgments

Income Tax FAQ

Income Tax Video Tutorial