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.

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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).