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.

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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

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** 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

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Leave encashment

Taxability for Government Employees

Taxability for Non-Govt Employees                 

1

During period of service

Fully taxable

Fully taxable

2

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 **

3

At the time of termination of employee

Fully taxable

Fully taxable


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

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