TDS on Unavailed Leaves Encashment

[Ashok Chopra]

Respected Forum,

At the time of full and final settlement (leaving service by giving resignation), an employee is being paid unavailed earned leaves for 90 days. 

Pls guide me, whether i should deduct TDS on it or it is 100% exempted from TDS.

No policy of the company to accumulate earned leaves, but we want to pay.

If no TDS is deducted, is there any liability on the company.

pls guide me accordingly

[CAGOPALJI AGRAWAL]

Your query is with regard to sec 10(10AA)(ii) of the Income Tax Act, The least of the following would be exempt:

a. Cash equivalent of the leave salary in respect of the period of earned leave standing to the credit of employee at the time to retirement/superannuation (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired); (See Note- 1)
b. 10 months’ ‘average salary’; (See Note- 2)
c. Rs3 lakh (applicable from 01.04.1998);
d. The amount of leave encashment actually received at the time of retirement.

Note- 1

How to find out leave standing to the credit of an employee at the time of retirement or leaving the job

Step (a) – Find out duration of services in number of years (ignore any fraction of year).

Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).

For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service.

Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:-

Step (a) × Step (b) minus Step (c) ÷ 30

Note- 2 

Note- 2

How to find out Average monthly salary?

Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.

 

Other relevant points

• Here, Average Salary is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement or superannuation.   Salary means last drawn salary and includes basic salary + Dearness Allowance (if terms of employment so provide) + Commission based on a fixed % of turnover.

• Where the cash equivalent of unutilised earned leave is received by an employee from two or more employers in the same year, or different years, the maximum amount exempt from tax shall not exceed the amount specified by the Government i.e., Rs. 3,00,000/-.

•   Salary paid to legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.

•   Sum equivalent of leave salary received by the family of a government servant who died in harness, is not taxable in the hands of the recipients.

AI Summary

Leave encashment exemption: determine the least of leave cash equivalent, ten months' average salary, prescribed ceiling and amount received. Exemption for cash payment of unavailed earned leave on leaving service is the least of the cash equivalent of earned leave standing to the employee, ten months' average salary, the prescribed monetary ceiling, and the amount actually received. Calculation steps: compute years of service (ignore fractions), apply the employer's leave credit rate capped at thirty days per year, subtract leave already taken or encashed and convert days to months, and compute average salary over the ten months preceding cessation including basic pay, dearness allowance where contractual, and fixed-percentage commission. Aggregation rules and death-related exemptions apply.