Income Tax Liability on Payment of leave encashment.

This query is : Resolved

manish jain (Querist)
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03 January 2008
Please clarify the following

1. Whether Leave Encashment is taxable which is paid to employee at the time of full & final settlement on his resignation.

2. Whether Leave Encashment is taxable which is paid to employee at the time of his retirement.

Regards.

Manish Jain
mjain@lc.jkmail.com,manishambika97@gmail.com

CA. Vineet Grover

CA. Vineet Grover (Expert)
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04 January 2008 Hi Manish,

As per Sec (10AA) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement [whether] on superannuation or otherwise ;

any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement [whether] on superannuation or otherwise as does not exceed [ten] months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement 38[whether] on superannuation or otherwise, [subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government] :

Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause [shall not exceed the limit so specified] :

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause [shall not exceed the limit so specified], as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

Explanation.For the purposes of sub-clause (ii),

[* * *] the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

The above exemption is applicable in respect of cash equivalent of earned leave at the employee's credit only at the time of retirement.

Rgds/
Vineet