Tax Talk: Resigned? Your encashed leaves are exempt from tax

• June 23, 2023
• CA Chandan Agarwal's Office

But first check if your employer allows encashment of leaves.

Leave encashment is compensation paid by the employer in lieu of unutilised leave. The first thing to understand about leave encashment is that unutilised leaves are not always eligible for encashment. This completely depends on company policy.

For instance, certain types of earned or privileged leaves, such as marriage leave, maternity leave, or paternity leave, are specifically designed to be utilised for a particular event or circumstance. These leaves are granted to employees to manage specific life events and they can remain unutilised if the corresponding event does not occur.

Also, not all companies offer encashment of unutilised leave as part of their policies. They view the idea of leave encashment as contradictory to the purpose of providing a leave period. Instead, they allow employees to carry forward part or full of the unutilised leave to next year or in some cases, the unutilised leave balance simply lapses within a specified timeframe.

Tax rules

As per Section 10(10AA)(ii) of the Income Tax Act (ITA), any payment received as leave encashment at the time of retirement or on leaving the job is exempt from tax up to the least of the following amounts i.e., minimum of the following four limits:

* Leave encashment actually received; or

*10 months average salary; or

* Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered: or

* Rs 25 lakh

The new limit of can be claimed over the lifetime of the employee.

The above provision is applicable to non-government employees, and government employees’ payments are completely exempt without any limits. Further, we must also keep in mind that only leave encashment received at the time of retirement or resignation is eligible for tax exemption. Accordingly, if the employee receives leave encashment during his service, such amount would be fully taxable.

In the Budget 2023 speech, the finance minister stated that the limit of Rs 3 lakh for tax exemption on leave encashment on the retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was Rs 30,000 per month. In line with the increase in government salaries, increasing this limit to Rs 25 lakh was proposed. With the rise in the limit for exemption, it appears that the ministry is attempting to adjust the exemption limit to the rising salary levels.

EMPLOYEE BENEFITS

* Section 10(10AA)(ii) of I-T Act allows tax exemption on leave encashment received at time of retirement or resignation for non-government employees

* The ceiling has now been raised to Rs 25 lakh from the earlier Rs 3 lakh

* Leave encashment payments received by government employees are completely tax free

Source: https://www.financialexpress.com/money/income-tax/tax-talk-resigned-your-encashed-leaves-are-exempt-from-tax/3138379/