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        Income Tax

        Example:-Mr. X retired from ABC Ltd. on 11th March 2014 after serving for 30 years and 11 months and the employer has paid him leave salary of ₹ 5,00,000. At the retirement, he was getting basic pay of ₹ 22,000. Further he was getting dearness allowance of ₹ 4,000 and 50% of the DA forms the part of salary for retirement benefits. The employee was entitled for 3 months leave for every year of service, but the employee has availed 7 months leave throughout the service and has encashed 4 months leave. Compute leave salary exemption u/s 10(10AA) for the AY 2014-15.

        10 August, 2015

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        Chapter No. 05 - Salary - Leave Salary Exemption - [Sec. 10(10AA)]

        Calculation of average salary:

        Basic = 22,000 x 10 = 2,20,000

        DA = 4,000 x 10 x .50 = 20,000

        Average Salary = (2,20,000 + 20,000)/10 = 24,000

        Calculation of Unavailed Leaves:

        Leaves calculated – leaves availed – leaves encashed = (30 - 7 – 4) = 19 months

        Leave Salary received exempt to the least of the following:

        1. 19 x 24,000 = 4,56,000
        2. 10 x 24,000 = 2,40,000
        3. ₹ 3,00,000
        4. ₹ 5,00,000

        ₹ 2,40,000 being the least of the four sums, is exempt u/s 10(10AA).

        Leave salary exemption under section 10(10AA) limited by average salary and statutory caps, yielding the lowest applicable ceiling. Computation of leave salary exemption under section 10(10AA) requires determining average salary by annualising ten months' basic pay plus the proportion of dearness allowance included for retirement benefits and dividing by ten. Unavailed leave months equal total entitlement minus leaves taken and leaves earlier encashed. The exempt leave salary is the least of (unavailed months x average salary), (ten months' average salary), and the statutory ceilings; the example selects the lowest applicable ceiling as exempt.
                        Cases where this provision is explicitly mentioned in the judgment/order text; may not be exhaustive. To view the complete list of cases mentioning this section, Click here.
                          Provisions expressly mentioned in the judgment/order text.

                              Leave salary exemption under section 10(10AA) limited by average salary and statutory caps, yielding the lowest applicable ceiling.

                              Computation of leave salary exemption under section 10(10AA) requires determining average salary by annualising ten months' basic pay plus the proportion of dearness allowance included for retirement benefits and dividing by ten. Unavailed leave months equal total entitlement minus leaves taken and leaves earlier encashed. The exempt leave salary is the least of (unavailed months x average salary), (ten months' average salary), and the statutory ceilings; the example selects the lowest applicable ceiling as exempt.


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