All salaried have different type of leaves namely: Sick Leave, Casual Leave, Earned/Privilege leave, etc. If employees take lesser leaves than they are eligible for, most employers encash the left over leaves either annually or at the time of leaving the company. Of all types of leaves only earned or privilege leave is encashable.
There is no fixed rule as how much leaves can be carried forward every year or how many leaves can be encashed. Most employers have their own rules. Usually the basic salary and dearness allowance is taken in consideration for calculation of the amount.
The tax of leave encashment is dependent on if you are government or private sector employee, or if you are encashing it at the time of retirement or mid-way. We take each case separately.
As you can see with the above income tax calculation, salary components and salary structure plays a very important role in how much income tax you pay. We have come up with some optimised salary structure using which you pay NO income tax even with CTC of more than Rs 20 Lakhs.
Government Employee:
The entire amount received as leave encashment is tax free.
Non Government Employee:
The leave encashment for private sector employees is stated in Section 10 (10AA) and is minimum of the following 4 factors:
We take an example to make the above calculation clear.
Rita is a non-government employee who receives Rs 6 lakh as her leave encashment at the time of retirement. She worked here for 25 years and was eligible for 45 earned leaves every year. Below is the calculation:
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Tax Calculation:
The tax exemption would be minimum of the below 4 points:
Earned leave eligibility as per above rule = 30 days X 25 = 750 days
Leaves used = 585 days
Leaves eligible for encashment (as per above rule) = 750 – 585 = 165 days (5.5 months)
Cash equivalent = 5.5 X 25000 = Rs 1,37,500
Tax exemption = Rs 1,37,500
Taxable component = Rs 6,00,000 – Rs 1,37,500 = Rs 4,62,500
Post tax deduction the leave encashment would vary from Rs 3.2 lakh (in the 30% tax slab) to Rs 4.15 lakh (in 10% tax slab)
Section 80C offers more than 10 investments where you can invest to save tax, However many a times you need not actually do this investment as its already covered due to expenses like children tuition fee or automatic EPF deduction for salaried. In case you are new to taxes and investment do read our helpful guide on How to take maximum advantage of Section 80C and choose the best investment to save tax.
There are differences between tax experts on the tax treatment of leave encashment at the time of resignation. Some consider it as taxable while others other consider the tax treatment same as at the time of retirement. We support the later:
The leave encashment is tax free for the government employee and the calculation is same as above for non-government employees. However the limit of Rs 3 lakh for non-government employee is for the entire lifetime. In case you already got Rs 1 lakh while leaving your job, going forward you can only have Rs 2 lakhs as tax exempted leave encashment.
If you encash leaves partially or fully while in service the income from encashment is fully taxable for both government and non-government employee.
The leave encashment is tax free when paid to the nominees or legal heirs at the death of employee.
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View Comments
I retired from a Public Sector Bank during last year 2018-19 and received Rs.12 lacs towards PL encashment.
What is the taxable income
I have a query: If my company asks me to leave, can the company cancel all my earned leave and ask me to leave without compensating me for the leave or partially compensating me for the earned leave I have?
Ideally no employer can cancel all your leaves without paying. In case its not resolved amicably you can reach out to labor department.
is there any documented rule under delhi shops and establishment Act for PL encashment which says
what number can be encashed and what to be kept in balance
whether form 10E to be filled for claiming leave encashment exemption? if yes which annexure? if no then how to claim the exemption?
Am resigning from my current Private organisation and wanted to know the procedure to claim tax rebate if my Earn leave @ resingnation is taxed on my final settlement. Kindly guide me the procedure to claim the tax rebate on the earn leave at resignation.
An informative article provided. Specified amount of Rs 3,00,000 is the aggregate amount allowed as exemption irrespective of frequency of leave encashment received by employee by various employers. If an employee has utilized Rs 2,00,000 already at the time of first resignation, he is only entitled to use balance of Rs 1,00,000 for the exemption computation next time.
Yes
A PSU is a Govt undertaking....owner being Govt. But PSU is not to be confused as Govt. PSU employees are therefore not Govt employees.
Dimag ka dhi karna ho to Leave encasment ke rule padh loo.
Please sir, I have been questioned by an employee, if the family planning incentive is eligible during encashment of leave, what is the rule position. I have no evidence with me. Please inform me whether the family planning incentive eligible. Please give me the govt. Order reference.
With regards.
MLNACHARYA
if an employ retireaedon supernuation but his qulifying servivice is 25 years 10 months and 7 days . leaves are 1225 days leave emcashment is due to him or not