Exemption of leave encashment to Bank Employee or PSU

[Lav Prajapati]

Whether employees of Nationalised Banks and Public Sector Undertakings are Government Employees ? And Leave Salary Encashment received by them is fully exempt or exempt upto specified Limit.

[Sadanand Bulbule]

In my understanding, employees of Nationalised Banks and PSUs are not treated as Government employees under the Income-tax Act. Accordingly, leave salary encashment received by them at retirement is exempt only up to the specified limit of Rs. 25 lakhs u/s 10(10AA), whereas for Central/State Government employees it is fully exempt.

[Lav Prajapati]

As per  - Kamal Kumar Kalia & Ors. Versus Union Of India & Ors. (2019 (11) TMI 1143 - DELHI HIGH COURT)

Merely because Public Sector Undertaking and Nationalised Banks are considered as ‘State’ under Article 12 of the Constitution of India for the purpose of entrainment of proceedings under Article 226 of the Constitution and for enforcement of fundamental right under the Constitution, it does not follow that the employees of such Public Sector Undertaking, Nationalised Banks or other institutions which are classified as ‘State’ assume the status of Central Government and State Government employees. It has been held in multiple decisions that employees of Public Sector Undertakings are not at par with government servants (Ref: Officers & Supervisors of I.D.P.L. v Chairman & M.D. I.D.P.L [2003 (7) TMI 733 - SUPREME COURT].

In the noted case of A.K.Bindal v Union of India [2003 (4) TMI 406 - SUPREME COURT] while considering the issue of revision of the pay scales of employees of government companies/PSUs at par with government employees, it was held that the employees of government companies cannot claim the same legal rights as government employees.

[KASTURI SETHI]

Answer to both queries is in the negative.

Employees of Nationalized Banks (Govt. of India Undertaking) and Public Sector Undertaking are not Govt. employees.

Service Rules of Govt. Bank employees are different from the Services Rules of Central Govt. Employees. Bank Employees are governed by the rules of the bank.

[Lav Prajapati]

As per  - Kamal Kumar Kalia & Ors. Versus Union Of India & Ors. (2019 (11) TMI 1143 - DELHI HIGH COURT)

Merely because Public Sector Undertaking and Nationalised Banks are considered as ‘State’ under Article 12 of the Constitution of India for the purpose of entrainment of proceedings under Article 226 of the Constitution and for enforcement of fundamental right under the Constitution, it does not follow that the employees of such Public Sector Undertaking, Nationalised Banks or other institutions which are classified as ‘State’ assume the status of Central Government and State Government employees. It has been held in multiple decisions that employees of Public Sector Undertakings are not at par with government servants (Ref: Officers & Supervisors of I.D.P.L. v Chairman & M.D. I.D.P.L [2003 (7) TMI 733 - SUPREME COURT].

In the noted case of A.K. Bindal v Union of India [2003 (4) TMI 406 - SUPREME COURT] while considering the issue of revision of the pay scales of employees of government companies/PSUs at par with government employees, it was held that the employees of government companies cannot claim the same legal rights as government employees.

[KASTURI SETHI]

The following judgement is also worth-reading :-

Income Tax

2023 (6) TMI 1476 - ITAT JAIPUR - Ram Charan Gupta Versus ITO, Ward-4 (2), Jaipur.

Exemption u/s 10(10AA)(i) - assessee who has retired is a bank employee - CIT(A) rejecting the amount which is earned leave encashment on retirement made by AO - HELD THAT:- Recently the Central Board of Direct Taxes Suo motu revised the limit for deduction u/s 10(10AA) and the revised limit now stood at Rs. 25,00,000 as specified vide Notification No. 31/2023 issued by the ministry of finance.

Since the leave encashment amount as claimed by the assessee which is below the revised limit of leave encashment exempt prescribed by the Board, the assessee is eligible to claim of deduction of said. Based on these observations the ld. AO is directed to allow the claim of the assessee u/s.10(10AA) of the act within the revised limit as prescribed. In terms of these observations the appeal of the assessee is allowed.

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AI Summary

Bank and PSU retirees get leave encashment tax exemption only up to Rs.25,00,000 under section 10(10AA) Employees of nationalised banks and public sector undertakings are not treated as Central/State government servants for Income-tax purposes; therefore leave salary encashment on retirement for such employees is exempt only up to the statutory ceiling (currently Rs. 25,00,000 under section 10(10AA)), whereas leave encashment received by Central or State government employees enjoys full exemption. Tribunal and high court decisions have applied this distinction and tax authorities follow the specified monetary limit when allowing exemption to retired bank/PSU employees.