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Tax Treatment of Leave Encashment on Retirement

Dr. Jones (Director) (253 Points)

11 January 2011

Hi,

On retirement, what is the tax treatment for Leave Encashment ?

I appreciate your help.

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4 Replies

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 11 January 2011

SECTION 10(10AA) l LEAVE SALARY

74. Leave salary - Specification of exemption limit in relation to employees who retire, whether on superannuation or otherwise, within the specified period, under sub-clause (ii) of clause (10AA)

NOTIFICATION 1

In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement whether on superannuation or otherwise, hereby specifies the amount mentioned in column (2) of the Table below as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise, within the period mentioned in the corresponding entry in column (3) of the said Table :

TABLE

Sl.	Amount	Period of retirement
No.	(Rs.)
(1)	(2)	(3)
1.	73,400	1st July, 1986 to 31st December, 1986
2.	75,600	1st January, 1987 to 30th June, 1987
3.	77,760	1st July, 1987 to 31st December, 1987
4.	79,920	1st January, 1988 onwards.

Notification : No. SO 553(E), dated 8-6-1988.

NOTIFICATION 2

In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement whether on superannuation or otherwise, hereby specifies the amount mentioned in column (3) of the Table below as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise, within the period mentioned in the corresponding entry in column (2) of the said Table :

TABLE

Sl. No.	Period of retirement	Amount (Rupees)
1.	1-4-1995 to 30-6-1995	1,30,320
2.	1-7-1995 onwards	1,35,360

Notification : No. SO 249 (E), dated 26-3-1996.

NOTIFICATION 3

In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether on superannuation or otherwise, hereby specifies Rs. 2,40,000 (Rupees two lakhs and forty thousand only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise after the 1st day of July, 1997.

Notification : No. SO 1015(E), dated 27-11-1998.

NOTIFICATION 4

In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs. 3,00,000 (rupees three lakhs only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise, after the 1st day of April, 1998.

Notification : No. SO 588(E), dated 31-5-2002

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CA MAULIK (C.A) (937 Points)
Replied 12 January 2011

Excempt from tax if u r a govt sector employee

if pvt sector ,than taxable as per income tax act ,1961

CA PARAS BAFNA (Practising CA ) (33428 Points)
Replied 12 January 2011

ENCASHMENT OF EARNED LEAVES -Section 10(10AA)

AT THE TIME OF RETIREMENT

Central & State Govt's employees- leave salay is exempt

Non Govt., Local Authority, Statutory Corporation's employees - Conditions Apply -

The Least of A,B, C & D

A Cash Equivalent of leave - (Calculate in the following manner)

Entitlement of leave - 30 days or 1 month every year of actual service renderd

Out of this Actual leave taken will be deducted

For the balance period he is entitled for encashment

Such Balance Period is multiplied by Avg Salary per month (of the Last 10 Months)

This is called leave encashment or cash equivalent of leave. .

B Calculate salary of the last 10 Months ( Salary of 10 months as calculated in Step A )

C Amount Specified by the Govt-300000/

D Amount Actually Received by the employee.

The least of A. B, C & D will be the exempted amount. Balance will be taxable.

Naresh Kumbhare (Others) (21 Points)
Replied 02 February 2015

My friend is a Government employee. Earlier, he was in Non-industrial cadre from which he has been abosorbed to Industrial cadre with continuity in service.Since the leave accumulated in Non-industrial cadre can not be carried forward to Industrial cadre, his leave accumulated in Non-industrial cadre was encashed during FY 2014-15 and paid. Pl let me know whether this leave encashmnet, which was not at the instance of my friend but official procedure, is taxable or not.

Thanks