Taxation Rules for Leave
Encashment – Brief Overview
Leave encashment is a process in which an employee receives monetary compensation in exchange for unused or accumulated leave days. In many organizations, employees are entitled to a certain number of paid leave days per year, which can be taken for various reasons such as vacation, personal or family emergencies, or illness.
Leave encashment is often provided as a
benefit to employees as it allows them to receive financial compensation for
leave days they did not utilize. It can be particularly beneficial for
employees who are unable to take their leaves due to work commitments or
personal circumstances.
Leave Encashment is the mechanism by which your
unused leaves can turn into additional income and allows employees to receive
compensation for their accumulated unutilized leave balance.
Different types of
leaves typically available to employees:
·
Casual Leave
·
Earned Leave Or Privilege Leave
·
Medical Leave
·
Holiday Leave
·
Maternity Leave etc.
Taxation of Leave
Encashment (before amendment):
|
Sl. |
Particulars of Leave Encashment |
Taxability |
|
1 |
Received During
Service |
The entire amount is
considered taxable and forms part of their 'Income from Salary.' *please note that
tax benefits can be claimed. (section 89 and Form
10E under IT Act 1961) |
|
2 |
Received at the time
of retirement or resignation: |
For Govt. Employees:
fully tax-exempt. For Non-Govt.
Employees: partly exempt and partly taxable. (Follow Section 10(10AA)(ii)) |
|
3 |
Legal Heir of a
Deceased Employee: |
fully tax-exempt |
Latest Update by CBDT:
Central Board of Direct Taxes (CBDT) raises
tax exemption on leave encashment for non-govt salaried employees to ₹25 lakh. The
direct tax authority said that the relief applies to the period of earned leave
in the credit of the employee at the time of retirement whether on
superannuation or otherwise. It is effective from 1 April, 2023.
The total tax-exempt amount under a section in
the Income Tax Act dealing with leave encashment of salaried private sector
employees shall not exceed the limit of Rs. 25 lakh.
In the case of government employees, the
entire leave encashment amount received is tax exempt. In the case of private
sector employees, the benefit is subject the conditions listed under section 10
of the Income Tax Act, which deals with incomes exempt from taxation.
Disclaimer: Every effort has been made to avoid errors or omissions in this material. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information.
