Leave Encashment
Leave encashment refers to the payment an employee receives for unused earned/privilege leave, either during service (as per company policy) or at the time of retirement, resignation, or termination. It converts accumulated but unused leave days into a monetary payout based on the employee's salary.
For non-government employees, leave encashment received at retirement or resignation is exempt under Section 10(10AA) up to the least of: actual amount received, ₹25 lakh (the current lifetime limit), 10 months' average salary, or the cash equivalent of leave balance (capped at 30 days per year of service). Leave encashment received while still in service is fully taxable.
Key points
- ✓ Exemption under Section 10(10AA) applies only at retirement/resignation, up to ₹25 lakh lifetime limit
- ✓ Leave encashed during service (not at exit) is fully taxable as salary income
- ✓ Government employees enjoy full tax exemption on leave encashment at retirement
- ✓ Exemption is least of: amount received, ₹25 lakh, 10 months' avg salary, or leave balance cash equivalent
- ✓ Encashment calculation typically uses last-drawn basic salary plus DA
Example
An employee retiring with 90 days of unused earned leave and a last-drawn (Basic + DA) of ₹50,000/month would receive leave encashment of approximately ₹1,50,000 (90 days × per-day salary), which is fully tax-exempt as it's well within the ₹25 lakh limit and other conditions.
Frequently asked questions
Is leave encashment during service taxable?
What is the current tax exemption limit for leave encashment?
Can I encash leave and also get gratuity tax-free at retirement?
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