{"id":7452,"date":"2020-01-06T09:25:00","date_gmt":"2020-01-06T03:55:00","guid":{"rendered":"http:\/\/www.apnaplan.com\/?p=7452"},"modified":"2021-04-07T02:05:12","modified_gmt":"2021-04-06T20:35:12","slug":"tax-leave-encashment","status":"publish","type":"post","link":"https:\/\/www.apnaplan.com\/tax-leave-encashment\/","title":{"rendered":"Leave Encashment: Calculation & Taxation"},"content":{"rendered":"\n

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.<\/strong><\/p>\n\n\n\n

Leave Encashment Calculation:<\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

Tax on Leave Encashment:<\/h2>\n\n\n\n

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.<\/p>\n\n\n\n

How to Pay 0 Income Tax on Salary of Rs 20+ Lakh (FY 2020-21)?<\/strong><\/h4>

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<\/a>.<\/p><\/div><\/div>\n\n\n\n

At the time of Retirement:<\/h3>\n\n\n\n

Government Employee:<\/strong><\/span><\/p>\n\n\n\n

The entire amount received as leave encashment is tax free.<\/p>\n\n\n\n

Non Government Employee:<\/strong><\/span><\/p>\n\n\n\n

The leave encashment for private sector employees is stated in Section 10 (10AA) and is minimum of the following 4 factors:<\/strong><\/p>\n\n\n\n

  1. Amount received as leave encashment<\/li>
  2. Maximum cap as stated by government \u2013 Rs 3 Lakhs<\/li>
  3. Last 10 months average basic salary & dearness allowance before leaving the job<\/span><\/li>
  4. Cash equivalent of the leave balance, subject to maximum of 30 days for each completed year of service<\/span><\/li><\/ol>\n\n\n\n

    We take an example to make the above calculation clear.<\/strong><\/span><\/p>\n\n\n\n

    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:<\/p>\n\n\n\n