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 .
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
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
Leave salary in this case is FULLY EXEMPT
|
Leave Salary received at the time of retirement |
Rs 5,00,000 |
|
Less : Exemption under section 10(10AA) |
Rs 5,00,000 |
|
Taxable Leave salary |
Nil |
(ii) He is a non-government employee
View answer
Salary for last 10 months
Basic-5000*8+4000*2=48000
DA =3000*60%=18000
Total Salary=66000
Average Salary for last 10 months=66000/10=6600
Amount Exempt is lower of following
|
(i) Leave salary received |
Rs 5,00,000 |
| (ii) Statutory limit |
Rs 3,00,000 |
|
(iii) 10 months salary based on average salary of last 10 months i.e. 10*6600 |
Rs. 66,000 |
|
(iv) Cash equivalent of leave standing at the credit of the employee based on the average salary of last 10 months (max. 30 days per year of service) Leave Due = Leave allowed – Leave taken = ( 30 days per year × 20 years ) – 480 days = 120 days
Cash equivalent of leave standing = [ 120 days / 30 days × Rs.6600] |
Rs.26,400 |
|
Min Exempt |
26400 |
Leave Salary taxable
|
Leave Salary received at the time of retirement |
Rs 5,00,000 |
|
Less : Exempt under section 10(10AA) [See Note below] |
Rs 26,400 |
|
Taxable Leave salary |
Rs 4,73,600 |
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 .