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Leave encashment

Diwakar Gupta (CA Final Student) (36 Points)

04 January 2013

Dear Members,

I have a certain query regarding Leave Encashment tax implications.

I have a Private limited company, we have a provision of carrying forward the unavailed leaves to the next year instead of giving cash to the employees. Is there any tax implication on this policy.

Regards

Diwakar

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6 Replies

CA Prashant Gupta (DGM (F & A)) (14068 Points)
Replied 04 January 2013

when leave is carry forward then there is no tax implecation on that.

because no payment was made

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Diwakar Gupta (CA Final Student) (36 Points)
Replied 04 January 2013

Dear Prashant,

Thank you for your reply. Can you please give me the Bare Act regarding this

kavitha (studying final) (830 Points)
Replied 04 January 2013

though i didnt get u, but let me help u

Meaning of Earned Leave

Normally in pay package of the employee two day or so is allowed as leave per month and if this leave is not availed then it will be accumulated subject to certain maximum limit and at the time of retirement/otherwise or on leaving the employer, pay equivalent to leave remaining unutilised in the employee account will be paid to employee. (rules varies from organisation to organisation).This type of leave is called Earned Leave and amount received in lieu of this unutilised amount is called leave salary/leave encashment.

(A)Leave salary received by any employee during the period of service.

Leave salary received by any employee during the period of service is fully Taxable.however relief under section 89 read with rule 21A can be claimed

B)Leave Salary to At the time of Retirement /superannuation or otherwise.

Leave salary given to other employee (non Central/State Government employee is exempted as per detail below.{section 10(10AA)(ii)} Least of following will be exempted.

Leave encashment Actually received.
Last 10 Month average salary .(average salary explained below)
Maximum amount fixed by the Government from time to time (given below)
Cash equivalent of salary in respect of the period of earned leave to the credit of the employee only at the time of retirement whether on superannuation or otherwise calculated maximum by 30 days maximum for every year of actual service rendered to employer from whose he has retired.

Leave encashment can be claimed u/s 43 b of income tax act, in the year of payment by employer

CA Prashant Gupta (DGM (F & A)) (14068 Points)
Replied 04 January 2013

Dear Diwakar

I don't think Bare Act will solve this. Income tax apply on leave encashment when it is received by employees. So when employee doesn't receive any money how can you make it taxable to them. so on commulative leave there is no tax. yes, when it will be encashed then it will be taxable according to income tax act.

kavitha (studying final) (830 Points)
Replied 04 January 2013

Originally posted by : CA Prashant Gupta
	Dear Diwakar I don't think Bare Act will solve this. Income tax apply on leave encashment when it is received by employees. So when employee doesn't receive any money how can you make it taxable to them. so on commulative leave there is no tax. yes, when it will be encashed then it will be taxable according to income tax act.