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Leave Encashment At Retirement: What Is The Tax Exemption Limit And How Is It Calculated?

In the fiscal 2023-24 budget, the government announced a new leave encashment limit of up to Rs 25 lakh for income tax exemption.

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Outlook Money
January 15, 2024
Senior Citizen Tax Slabs

Senior Citizen Tax Slabs

As per the law, every salaried individual can take a minimum number of paid leaves in a financial year. The employee may either utilize them in a financial year, carry them forward to the financial year, or encash the accumulated leaves at retirement or resignation.

Most organizations allow employees to take forward unused paid leaves from one financial year to another. However, the type of leaves allowed for future redemption may vary from employer to employer. Employers are legally obligated to compensate employees for unused paid leave. Likewise, employees can encash their entitlements during or after retirement or resignation.

Additionally, the types of leaves and rules for carrying them forward from one financial year to another may also vary from one organization to another. For example, the company may have casual leave, earned or privileged leave, medical leave, holiday leave, maternity leave, etc., and the rules regarding their duration, conditions for applying, and the carrying forward mechanism may differ. Some companies allow employees to go on long sabbaticals to upskill or expand their knowledge and offer them reimbursements so they can be more productive upon rejoining duties.

Tax Liabilities For Leave Encashment

However, one should also be well-informed about their tax liabilities for leave encashment if they want to receive their accumulated benefits in a lump sum at retirement or resignation.

In the fiscal 2023-24 budget, the government announced a new leave encashment limit of up to Rs 25 lakh for income tax exemption, effective from April 1 in both old and new tax regimes.

Suneel Dasari, founder & CEO of EZTax.in, an income tax e-filing portal, says, “Taxability of such payments is governed by Section 10 (10AA) of the Income Tax Act. The maximum tax exemption limit for leave encashment at retirement has increased from Rs. 3 lakh to Rs. 25 lakh in FY2023-24. The amount received is entirely taxable during the service.”

Also Read: How Can Senior Citizens Avoid Capital Gains Tax?

How Is Leave Encashment Calculated?

Leave encashment is calculated based on the following conditions for government and non-government employees. Explains Dasari, for government employees, leave encashment is entirely exempt from taxation at the time of retirement. For non-government employees, leave encashment is exempt from taxation to the minimum of the following extents: Rs 25 lakh, actual leave encashment received, 10 months average salary, and the period of earned leave in months (Leave allowed-leave taken/30 days) * 10 months average salary.”

Finally, the number of paid leaves per year during employment varies by employer. The unused paid leaves can amass over a year. Thus, employee leaves during the service or upon retirement usually determine leave payout.

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