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Leave Encashment

Pavan (Manager) (80 Points)

22 December 2009

Hi All,

Leave encashment should be calculated on basic or gross salary?

Or it depends on the company policy?

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14 Replies

CA Harish Suwalka (Chartered Accountant ( Bhilwara )) (4125 Points)
Replied 22 December 2009

it depends on company policy...

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Vivek Jarial (Student) (272 Points)
Replied 22 December 2009

it is calculated on basic salary......

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 22 December 2009

It certainly depends on the company policy only...

Pavan (Manager) (80 Points)
Replied 22 December 2009

Thanx

Please try to answer this

Suppose an employee is leaving the organisation in January'2010. He has loss in repect of house property income say amount Rs.150000

So while computing the TDS for the month of December'09, we have to consider the entire loss or we have to consider it on proportionate basis.

Thanks in advance

dinesh (audit) (60 Points)
Replied 22 December 2009

1)Leave encashment will be calculated depends on the companys policy....

2)Since TDS for salary will be calculated on Average salary basis...Full house property loss should be taken into Account (here 150000) for finding the TDS amount for the month of December....

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Indu (Articled Clerk) (104 Points)
Replied 22 December 2009

it is calculated on basic salary you study the income from salary you will be getting in detail

dinesh (audit) (60 Points)
Replied 22 December 2009

To indu

1)Payment to employee in respect of Leave encashment-On the basis of companys policy.

2)Claiming exemption in respect of Leave encashment-On the basis of basic salary.

Robin Kumar Gupta (profession) (179 Points)
Replied 22 December 2009

Agreed with reply of Mr. Dhiraj and Mr. Dinesh

Companies themselves frames the leave encashment policy.

And from taxation point of view employees can claim exemptions according to rules framed u/s 10(10AA) of Income tax act. which are as under : -

Leave Encashment during service is fully taxable in all cases.Relief u/s 89(1) if applicable may be claimed for the same.

Payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt. Vide notification No. 10749 dated 27.11.1998, limit on the maximum amount receivable by employees of Central Govt. has been specified at Rs 2.4 lakhs for employees retiring whether on superannuation or otherwise after 1.7.1997.
In case of other employee, the exemption is to be limited to a maximum of 10 months of leave encashment, based on last 10 months average salary. This is further subject to a limit of Rs. 2,40,000 for retirement after 1.7.97.
Leave salary paid to legal heirs of the deceased payment is being made must be framed in accordance with the guidelines prescribed in Rule 2BA of Income Tax Rules. In case of a company other than a public sector company and a cooperative society, such scheme must be approved by the Chief Commissioner/Director General of Income Tax. However, such approval is not necessary from AY 2001-2002 onwards.
Where exemption has been allowed under above section for any assess-ment year, no exemption shall be allowed in relation to any other assessment year.

Sandeep Pandey (CA FINAL) (1306 Points)
Replied 22 December 2009

I agree with Robin

Robin Kumar Gupta (profession) (179 Points)
Replied 22 December 2009

An employee can get the set off of loss from house property if he declares such loss to its employer before deducting TDS.

After that employer after going through the below mentioned procedure can deduct tax if there is any: -.

T.D.S on salary is deducted on the assumption basis.While making the payment of Salary, deductor should consider the following and deduct correct TDS from the payment being made.

Calculate the annual Approximate/Actual Salary
1. Calculate the Exact Taxable Salary amount Paid/Payable till current month for the financial year.
2. Calculate the approximate salary that will be paid for rest of the FY, assuming the current month salary for rest of the year salary.
Add any other income reported by the Assessee [Employee].
Deduct if any Loss declared by the Employee, from the annual taxable salary. Note that, only House property loss (interest in case of Self Occupied House Property) should be considered.
Deduct the allowed deductions declared by employee under Section 80C, 80D, 80G, etc.
Calculate the Income Tax, Surcharge and cess on the net Income, as per the “Rates in Force”
Deduct if any rebate U/s 88E or Relief U/s 89. (explain the heads)
Keeping it as total tax, now deduct the TDS made till last month from it.
Divide the net TDS by “Remaining number of months in the FY, including current month”.
Deduct this amount from employees Salary