Have you heard of the term ‘leave encashment’?
The concept of leave encashment is quite common among the salaried class. Sounds like even your leaves can bring you some income.
Read on to know more about the meaning and taxability of leave encashment received by employees
Every salaried person, as per labour law, is entitled to a minimum number of paid leave every year. However, it is not necessary that an individual employee utilises all the leave he is entitled to in a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves.
This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company, as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.
The different types of leaves are mentioned in the leave policy of a company. The leave policies differ from company to company. Here are the types of leaves generally available for the employees:
Leave encashment received by employees is taxable based on when it is received. If an employee gets leave encashment while on his job, that amount becomes fully taxable and forms part of ‘Income from Salary'. However, you can claim some tax benefits under Section 89 of the Income Tax Act. You must fill up form 10E to claim the tax relief for leave encashment. You can fill up and submit this form online on the income tax portal.
Here are the following conditions under which you can claim partial or complete exemption of leave encashment received at the time of retirement:
Leave encashment received by
|State and Central Government employees||Fully tax-exempt|
|Non-government employees||Partly exempt and partly taxable. |
The exemption is based on the calculation specified in Section 10(10AA)(ii).
|Legal heir of a deceased employee||Fully tax-exempt |
Leave encashment amount received by the Legal heir of a deceased employee is fully tax-exempt in the hands of the legal heirs.
Formula for computing leave encashment exemption of Non-government employees:
|Leave encashment received (A)||XXXX|
|Less: Exemption under Section 10(10AA) – (B) Least of the following:||XXXX|
|i) Amount notified by the Government** Rs 3,00,000 (C)|
ii) Actual leave encashment amount (D)
iii) Average salary* of last 10 months (E)
iv) Salary per day * unutilised leave (considering maximum 30 days leave per year) for every year of completed service (F)
|Leave encashment taxable – (A) – (B)||XXXX|
*Salary for this purpose includes basic salary, dearness allowance and commission based on fixed percentage of turnover secured by employee** 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 utilised 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. Hence, overall employee is allowed total exemption of only Rs 3,00,000 with respect to leave encashed from all employers.
Let us understand leave encashment exemption with the help of an illustration:
Mr A is retiring after 15 years of service.
Mr A was entitled to 35 days of paid leave per annum from his employer, i.e., overall 525 days of leave during his entire service. (35*15)
Out of the same, Mr A has already utilised 200 days of paid leave and is left with 325 days of unutilised leave. Mr A was drawing basic salary + DA of Rs 33,000 per month at the time of retirement and received Rs 3,57,500 as leave encashment calculated based on 325 days * Rs. 1,100 (salary per day = Rs.33,000/30 days).
Amount (in Rs)
|Leave encashment received||3,57,500 (325 days* Rs 1,100)|
|Least of the following:|
1. Amount notified by the Government
2. Actual leave encashment
3. Average salary for 10 months= Rs 33,000 * 10 months
4. Rs 1,100 * (30 days * 15 completed years of service minus 200 days of utilised leave)
|Leave encashment taxable as ‘income from salary||82,500|
Based on the employer’s leave encashment policy and income of an individual, tax planning can be made by deciding whether it is beneficial to encash leave year on year or to receive lump-sum at the time of retirement or resignation.
One may consider the cost of inflation as well before deciding on the same.
Leave Salary is a part of leave encashment that is accumulated over time and encashed later.
Yes, leave encashment is taxable. But the taxation conditions differ between sectors and employers.