Leave Encashment

[KUMAR Narasimhan]

An Employee who works in Private Organization and does a service of 20 years.

10 days Leave encashment allowed every year (Out of 30 days remaining 20 days is Sick and Casual Leave).

Employer Encash the leave over and above 90 days during every year and the amount received by the employee is fully taxable.

On the date of retirement employee received 90 days a Leave encashment. Is this amount is subject to Tax?

[KASTURI SETHI]

Leave encashment is part of salary. There is conditional exemption. Go through Section 10 (10AA(ii) of the Income Tax Act which is extracted below:-

[(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 47[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 48[whether] on superannuation or otherwise as does not exceed 49[ten] months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement 50[whether] on superannuation or otherwise, 51[subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit 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 52[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 53[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.

[KUMAR Narasimhan]

Dear Sir,

The Leave encashment received every year is subject to fully Taxable, but the time of retirement, he gets 90 days as Leave Encashment. In my view it is exempted. Please clarify sir

[KASTURI SETHI]

I did not post explanation to Section 10(10 AA)(ii)

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

55[* * *] 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.

From this explanation, it is clear that 90 days' leave encashment is exempted.

However, I am not expert in the field of Income Tax Act. Other experts are requested to offer their comments.

[DR.MARIAPPAN GOVINDARAJAN]

The views of Sethi are correct

[KASTURI SETHI]

Dr.Govindarajan Ji,

Sir, A huge thanks for validation of my reply.

AI Summary

Leave encashment exemption limits retirement cash equivalents of earned leave for non-government employees under a statutory cap.
Payments of leave encashment during employment are fully taxable, while payments on retirement qualify for a conditional exemption under Section 10(10AA) for the cash equivalent of earned leave up to the statutory cap; the statutory explanation limits earned leave entitlement to thirty days per year of service with the retiring employer, so retirement encashment within that entitlement falls within the exempt portion, subject to aggregate limits and adjustments for multiple employers or prior receipts.