Leave Encashment Salary Exemption - [Section 10(10AA)] - Income Tax - Ready Reckoner - Income Tax

LEAVE SALARY EXEMPTION [Section 10(10AA)] If Leave salary encashment is received by any employee while in employment then it is fully taxable in the hands of employee. Leave encashment received at the time of termination of employee, is fully taxable. While if leave encashment is received in case of retirement or superannuation or resignation, then exemption is available up to the following limits: In case of Central government or State government employee (excluding employees of a local authority or statutory corporation) then leave salary encashment is fully exempt. Retired employees of PSUs and nationalised bank cannot be treated as Government employees and thus, they are no entitled to get full tax exemption on leave encashment after retirement/superannuation u/s 10(10AA). [ Kamal Kumar Kalia v UOI 2019 (11) TMI 1143 - DELHI HC ] In case of any other employee , least of the following shall be exempt : Actual amount received The amount specified by the government Rs. 25,00,000/- ( Form 01.04.2023 Notification No. 31/2023 Dated 24th May, 2023) Rs. 3,00,000/- (From 01.04.1998 to 31.03.2023 Notification No. 123 dated 31st May, 2002 ) 10 months Average Salary Average Salary x leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service) Average Salary = Average of salary drawn in the last 10 months immediately preceding the date of retirement. Salary includes basic pay, dearness allowance to the extent it forms part of retirement benefits and percentage wise fixed commission on turnover. If leave encashment is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of leave salary cannot exceed Rs. 25,00,000/-. If the employee had received leave encashment in any one or more earlier PY and had availed of the exemption in respect of such amount, then the limit specified above shall be reduced by the amount of exemption availed earlier. Note:- Relief u/s 89 read with Rule 21A can be claimed by the employee in cases where the amount of leave encashment is fully taxable. Leave salary (or leave encashment) received by the legal heir of the deceased employee is not at all taxable in the hands of his legal heirs