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Tax Treatment of leave Encashment :

Tax Treatment of leave Encashment :

Leave Encashment?

According to the labour laws Every employee is entitled to certain no. of paid leaves every
year. If employee is unable to utilize the same most of employer allow them to carry forward
to next year or compensate the accumulated leaves. Any payment received against such
accumulated leaves called leave encashment.

Tax Treatment of Leave encashment :

  1. Leave Encashment Received during the employment :

If an employee receives leave encashment during the tenure of service that amount
shall be fully taxable in the year in which it is received under the head income From
Salary. However, Relief u/s 89 can be claimed. To claim the relief u/s 89 Form 10E is
required to file along with Income Tax Return.

2. Leave Encashment Received at the time of Retirement :

  1. Received By State Or Central Government Employees:

Leve Encashment Received by Central Govt. or State Govt at the time of
retirement Shall be fully Exempt.

2. Received by Non-Government Employees

Leve Encashment Received by non-government employee at the time of
retirement Shall be least of Following Shall be Exempt:

  • Notified Amount i.e. 300000**
  • Actual amount received as leave encashment
  • Average salary of last 10 months
  • salary per day X unutilised leave (considering maximum 30 days leave per year) for every year of completed service.

** Union Budget Proposed to increase the limit to 2500000.

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