Leave Encashment Tax Exemption for Government Employees – Income Tax Rule 10(10AA)

Leave Encashment Tax Exemption for Government Employees – Income Tax Rule 10(10AA)
Leave Encashment Tax

For tax treatment of leave encashment u/s 10(10AA) of Income Tax Act 1961 the employees has been classified into two types :
  • Government Employees
  • Non-Government Employees
Government Employees

As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is exempt from tax.

In Simple, any 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.


Non-Government Employees

In the hands of non-Government employee exemption will be least of the following:

Least of the following shall be exempt from tax:

a) Amount actually received

b) Unutilized earned leave* X Average monthly salary

c) 10 months Average Salary**

d) Rs. 3,00,000

* While computing unutilized earned leave, earned leave entitlements cannot exceed 30 days for each completed year of service rendered to the current employer


** Average salary = Average Salary*** of last 10 months immediately preceding the retirement

***Salary = Basic Pay + DA (to the extent it forms part of retirement benefits)+ turnover based commission

Ready Reckoner

Sl. No

Leave encashment

Taxability for Government Employees

Taxability for Non-Govt Employees                 


During period of service

Fully taxable

Fully taxable


At the time of retirement or separation (other than on account of Termination)

Fully exempt

Leave Exemption is least of the following: 
1) Rs 3,00,000 
2) Leave encashment amount actually received 
3) 10 months’ salary (on the basis of average salary of last 10 months ) * 
4) Cash equivalent to leave to the credit of employee at time of retirement **


At the time of termination of employee

Fully taxable

Fully taxable

Source :https://www.incometaxindia.gov.in

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