Can Rs. 25 Lakh Leave Encashment exemption be claimed retrospectively? Legal analysis

Author's note: 'Aman, is there any change in Income tax act regarding leave encashment? Can we claim retrospectively up to 25 lakhs?' This was asked to me by my client. I thought about it, ran through budget 2026 in my mind and new income tax act, 2025 but wasn't sure about it, hence I researched on this topic. Hope you will get something out of this research.

Introduction

You might be thinking, what actually this leave encashment means? It is simply a benefit which is received by the employees at the time of retirement or resignation, and for the non-government employees, taxation of leave encashment is mostly in debate because of a monetary ceiling on exemption under Section 10(10AA) of Income tax act 1961 (Section 19 of Income tax act, 2025).

What happened was, with effect from 1st April 2023, the central government had enhanced the exemption limit from Rs. 3,00,000 to Rs. 25,00,000 for non-government employees. This amendment brought substantial relief, especially by considering that the cap of Rs. 3 lakh is unchanged since 2002.

Note: Leave encashment that is received by a Government employee at the time of retirement (including superannuation, resignation, death, etc.) is fully exempt from tax, hence I am specifically talking about non-government employees.

Now, post this amendment, a new and important legal question came in place, i.e. 'Whether the enhanced exemption limit of Rs. 25 lakh applies retrospectively to retirees of earlier financial years?'

The fact is various benches of the Income Tax Appellate Tribunal, including Jaipur, Delhi, Chennai, and Bangalore, have taken a liberal view by holding that the enhanced limit has retrospective applicability in deserving cases.

In this article I have provided with a detailed legal and practical analysis relating to such matters.

Limits for leave encashment

As discussed for non government employees incl that of PSU, etc, the exemption is limited to the least of actual leave encashment received, 10 months average salary, cash equivalent of leave balance (maximum 30 days per year of service) or government-notified monetary limit

Previously, government-notified monetary limit was Rs. 3,00,000, which was revised (Notification dated 24.05.2023) to Rs. 25,00,000

Now the legal issue came that whether it's prospective or retrospective?

The department argued that the notification effective from 01.04.2023, Therefore applicable only to retirees from FY 2023-24 onwards, but for that the assessee argued that the amendment is beneficial in nature, no new tax burden introduced, It merely enhances exemption limit and the beneficial provisions should be interpreted liberally, Therefore, it should apply retrospectively.

The view of ITAT

Several ITAT benches (like Jaipur, Delhi, Chennai, Bangalore) have held that the enhancement is beneficial legislation, it removes the hardship and corrects long-standing anomaly. Hence, it was at the opinion that this judgement should also apply to the matters that are still pending as well as that of earlier assessment years, and ruled in the favour of assessee.

The tribunals relied on the principles that are 'beneficial' as well as the 'curative amendments' should be interpreted liberally and applied retrospectively unless specifically restricted.

Case Laws relating to the same

Chandra Prakash Vashistha vs. ITO

Citation: ITA No. 1139/JPR/2025, Jaipur (ITAT)
Here, assessee who was a retired employee of SBI received Rs. 13,05,810 as leave encashment. Assessing Officer and CIT(A) restricted exemption to Rs. 3 lakh under Section 10(10AA). Tribunal held that the revised limit of 25 lakh under Notification No. 31/2023 (Section 10(10AA)) applies retrospectively, beneficial provision must be extended to earlier assessment years allowing full exemption.

Govardhan Deepchand Bhambhani v. ITO

Citation: Govardhan Deepchand Bhambhani Versus The ITO, Ward-7 (2) (1), Ahmedabad - 2025 (7) TMI 1812 - ITAT AHMEDABAD

Here, a employee retired from PNB, whose leave encashment of 7,65,404 was taxed beyond 3 lakh, hence the tribunal held that the enhanced 25 lakh limit per Notification No. 31/2023 and followed coordinate bench rulings (like that of Govind Chhatwani, Ram Charan Gupta) to allow the full exemption

Coordinate bench precedents

Various Tribunal benches (such as Jaipur Bench) have issued decisions referred to as authorities in later orders, as I have discussed above like Govind Chhatwani v. CIT(A), here the Tribunal held that the exemption limit revised to 25 lakh under Notification No. 31/2023 must be applied even when returns were filed earlier, Ram Charan Gupta v. CIT(A), which stated that earlier Tribunal ruling on the same issue (coordinate bench) referenced in subsequent orders, Devendra Kumar Gupta case was taken up by another Bench applying the revised limit to pre-notification assessment years.

CBDT Notification No. 31/2023

This notification provided that the 25 lakh limit is being interpreted as beneficial and applied to earlier assessment years, particularly where the taxpayer did not previously claim the benefit.

Important legal principles used

Being a law student, I thought let's also discuss the principles used by ITAT, the first one is 'Beneficial Legislation Principle' that means the courts consistently hold that relief-granting provisions should receive liberal interpretation and in case the ambiguity exists, interpretation favouring the taxpayer must prevail.

Secondly, 'Curative Amendments' that means in case the amendment seeks to remove hardship or correct anomaly, it is treated as retrospective in operation, also the notification enhanced the monetary limit but did not explicitly state that earlier retirees are barred.

This also tells us how important it is to amend the law, each and every word or missing sentence even if it's implied can be challenged in the court.

Practical issues as inter-alia faced by client

Many retirees haven't claimed higher exemption because the law at that time restricted it to Rs. 3 lakh, but later the tribunals have held that the tax relief cannot be denied merely because it was not claimed earlier, Hence, where tax has been paid on excess amount, refund may be sought through rectification under Section 154(Section 287 as per Income tax act, 2025), Revised return (if within time) or Condonation under Section 119(2)(b) i.e. Section 239 ofIncome tax act, 2025.

Let's discuss condonation of Delay i.e.Section 239 ofIncome tax act, 2025

CBDT is empowered to condone delay in filing return, claiming exemption and claiming refund, for that the application may be filed within 5 years from the end of the relevant assessment year (now called tax year). The conditions for the same is genuine hardship, bona fide claim and no deliberate delay

For example:

Rectification Route i.e.Section 287 ofIncome tax act, 2025

If assessment order is already passed then the application under Section 154(old act)/287 (new act) may be filed provided the issue is apparent from record. However, department may resist saying the matter involves interpretation or it's not apparent mistake. Therefore, in many cases, this route may be safer.

Example

Employee retired in FY 2021-22.

Leave encashment received: Rs. 12,00,000
Exemption allowed at that time: Rs. 3,00,000
Taxable: Rs. 9,00,000

Under enhanced limit, the exemption allowable is Rs. 12,00,000 (within 25 lakh cap)

Taxable portion becomes NIL.

Tax paid on 9 lakh becomes refundable (subject to relief approval), This can be a substantial amount, especially in higher tax brackets.

Whether Interest Is Payable on Refund?

Practically speaking, where there is a delay is due to condonation application, generally the interest under Section 244A(Section 437 of new income tax act, 2025) may not be payable. Particularly if refund arises due to delayed claim.

Litigation risk

As of now, the ITAT decisions are favourable and there is no binding High Court or Supreme Court ruling yet settling issue conclusively, hence the department may file appeals as in my opinion, there is a question of law in this case. Therefore, position is favourable but not fully settled.

Documentation to be maintained

For condonation/rectification application, you must maintain retirement letter, leave encashment computation, Form 16, Original ITR copy, tax computation, proof of tax paid, calculation under revised limit, copy of relevant ITAT decisions, and the affidavit stating bona fide hardship.

Conclusion

The enhancement of leave encashment exemption from 3 lakh to 25 lakh marks a significant relief for non-government employees. Tribunal rulings indicate a favourable trend supporting retrospective applicability. Additionally relief cannot be denied merely due to earlier non-claim, condonation can be a step in claiming refund at later stage, also the retirees from FY 2019-20 onwards may still get remedy as per the retrospective impact as I discussed above. However, as no final High Court or Supreme Court ruling exists, litigation risk is there.

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