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What is Leave Encashment

Normally company provides a fixed number of leaves to employee. If a person takes less number of leaves, he can claim salary from the company for leaves not taken, This is called leave salary or leave encashment.

 Leave Salary or Leave Encashment [Section 10(10AA)] - Taxability Of Retirement Benefits

As per Income tax,

1.If this leave salary is provided during tenure of service, it is fully taxable

2.However if it is provided after retirement, then it is fully exempt for government employees.

3.However for non government employee ,the amount exempt is lower of

  • Actual Amt Received
  • 300000
  • 10 Month Average Salary
  • Cash equivalent of (30 days leave entitlement) for each completed years of service less Leave Taken)

Note :-

Average salary is calculated by taking average of last 10 months salary .

Salary means Basic +DA+ Commission as % of turnover

 leave salary enchashment exemption.png

 

EXAM QUESTION

Mr. Gupta retired on 1.12.2015 after 20 years 10 months of service, receiving leave salary of Rs 5,00,000.

Other details of his salary income are:

   

Basic Salary

Rs 5,000 p.m. (Rs 1,000 was increased w.e.f.1.4.2015)

Dearness Allowance

Rs 3,000 p.m. (60% of which is for retirement benefits)

Commission

Rs 500 p.m.

Bonus

Rs 1,000 p.m.

Leave availed during service

480 days

He was entitled to 30 days leave every year.

You are required to compute his taxable leave salary assuming:

(i)  He is a government employee

View Answer

(ii) He is a non-government employee

View Answer

 

Leave Encashment Already Claimed Earlier

(1)In case of Change of job during year,

Limit of Rs.300000/- is the overall limit (whether received from one employer or more than one employer)

 

(2) Limit of Rs.300000/- is reduced by any amount of exemption claimed earlier

For Example

If the assesse has claimed exemption Earlier of Rs.100000/- regarding leave encashment balance Rs.200000/- maximum exemption he can claim this year .  

 

  1. Income Tax
  2. Income from Salaries
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About the Author

CA Maninder Singh's photo - Expert in Practical Accounts, Taxation and Efiling
CA Maninder Singh
CA Maninder Singh is a Chartered Accountant for the past 8 years. He provides courses for Practical Accounts, Taxation and Efiling at teachoo.com .
  • Md Shahbaz's image
    Yahn salary to hm april 2015 to november2015 tk ka lenge na bcox 1.12.15 ko to retire ho ja rha h...
    Isliye salary =(5000 1000)8m(april to novmbr)..
    Pls rply me nd try to clear my daubt pls..😊😊
    View answer
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