Leave Encashment Exemption Section 10(10AA)

By | July 6, 2015

All Most all the private sector employees receives leave encashment component as part of their full and final settlement. But As per section 10(10AA) leave encashment is exempt from income tax to the extent allowed.

Leave Encashment – Government Employees:

As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is wholly exempt from tax.

Leave Encashment – Non Government Employees:

Any leave encashment received by non-government employees at the time of retirement/termination of employment, is exempt. The exemption will be least of the following:

1. Period of earned leave standing to the credit in the employee’s account at the time of retirement × Average monthly salary

2. 10 months Average monthly salary

3. Rs. 3,00,000, Maximum amount as specified by the Government

4. Leave encashment actually received at the time of retirement.

Leave credit to the account of the employee at the time of retirement should be restricted to 30 days per year of service if leave entitlement as per service rules exceeds 30 days per year of actual service.

Salary for the above purpose means average salary drawn in the past ten months immediately preceding the retirement (i.e., preceding the day of retirement) and will include basic salary, dearness allowance (if considered for computing all the retirement benefits) and commission based on fixed percentage of turnover achieved by the employee. Apart from the above items, salary for this purpose does not include any other allowances or perquisites.

Let us understand this with the help of example; Mr. Ram while retiring from Awadh Securities Pvt Ltd received leave encashment of Rs. 2,00,000. His period of leave standing to his account was 25 days, total years of service is 15 years. His Basic salary including DA was Rs. 25,000 per month. Let us now calculate the exemption amount;

1. Period of leave (15days*15years)/30 days x Average monthly salary (Rs. 25000) i.e. Rs. 1,87,500/-

2. 10 months average salary (Rs. 25,0000 * 10) i.e. Rs. 2,50,000

3. Rs. 3,00,000

4. Actual leave encashment received i.e. Rs. 2,00,000

So the maximum exemption will be Rs. 1,87,500. Taxable component of leave encashment will be Rs. 12,500.

ANY LEAVE ENCASHMENT RECEIVED DURING EMPLOYMENT IS FULLY TAXABLE IN THE HANDS OF THE RECEIVER.

Bare Act Reading

(10AA) (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ;

(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government :

Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause shall not exceed the limit so specified :

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause shall not exceed the limit so specified, as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

Explanation.—For the purposes of sub-clause (ii),—

the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;

22 thoughts on “Leave Encashment Exemption Section 10(10AA)

  1. UA Patro

    I am an employee of a Central Public Sector under taking. I am retiring on 31st March 2016 after completing 35 Years of service. I have 300 days of encashable leave to my credit.
    Please clarify whether the total amount will be exempted from Income tax?

    Reply
    1. Murugan

      Please reply to me, as the same question from me, since I am also retired class I officer from public sector under taking of Tamil nadu government.

      Reply
    2. K.M.Bhandarkar

      I am retired principal and received encashment amount of el after retirement ? Whether this amount is taxable?

      Reply
  2. Ramkishan sharma

    I am employee of PSU. I am retier on july-15 Ihave 300days encashable leave to my credit. I want fill ITR AY2016-17 where is the show exampet amount. Not show section10(10AA)coloum in ITR form.

    Reply
    1. Ramkishan sharma

      Your comment is awaiting moderation.
      I am employee of PSU. I am retier on july-15 Ihave 300days encashable leave to my credit. I want fill ITR AY2016-17 where is the show exampet amount. Not show section10(10AA)coloum in ITR form.

      Reply ↓

      Reply
  3. V R K RAJU

    Going by commonsense, any Act passed in Parliament should be equally applicable irrespective of whether an employee is a govt Employee or a Non-Government Employee. Whereas Section 10 AA is discriminatory giving maximum exemption of only 3 lakhs for non-govt employees but giving full exemption for government employees. Why this discrimination and how it is justified?

    Reply
  4. V R K RAJU

    How can the Income Tax Act an Act passed in Parliament, discriminates against non-government employees in allowing the exemptions. How it is justified?

    Reply
    1. Prof. Vanitha

      Govt Employees get a maximum of Rs 3,00,000 only and that is the ceiling used in Income Tax

      Reply
  5. ashok

    I am also employee of cooperative sector , even though our salary and other amolument on far with state govt besides all these income tax deducted for amount earned for leave encashment at the time of retirement if exceeds 3lakh , this is discrimination among the employees having same type of income. All should raise our voices irrespective classes

    Reply
  6. S S Choudhary

    Leave Encashment – Government Employees:
    As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is wholly exempt from tax.

    With Ref to above section 10(10AA) is applicable to an employees retired from MSEDCL ( A govt of Maharashtra undertaking)

    Reply
    1. V A Badiger

      I am an employee of a Karnataka State electricity Sector under taking. I am retiring on 31st -Dec 2016 after completing 38 Years of service. I have 295 days of encashable leave to my credit.
      Please clarify whether the total amount will be exempted from Income tax?

      Reply
  7. Ramesh Satija

    I retired from an educational institute which is institute of national importance created by an act of parliament(same is the case of IIT), I would like to know whether my leave encashment would be fully exempted from income tax

    Reply
  8. Ashok K Gupta

    I am an employee of an Autonomous Body under Ministry of Human Resource Development, Govt of India.We are equally treated as Government employee. I have applied through proper channel to some other Autonomous Body under MHRD.

    Now I have tendered my Technical Resignation upon my selection to another Autonomous Body. I have accumulated approx leaves of 150 days (including EL/ HPL). As per the rule 39(2B) or so, I shall be encashing all the leaves at my credit, for which exemption prevail in line with the available provisions under section 10(10aa) of Income Tax Act, as learned from various sources.

    But my Account Officer is stating that the receipt of amount towards encashment of Earned Leave will be taxable, which is contradictory to what section 10(10AA) states i.e. the leave encashment of government employees is exempted.

    I would really appreciate if you could enlighten/ guide me on the issue before it is escalated too much.

    Reply
  9. Ashok K Gupta

    I am an employee of an Autonomous Body under Ministry of Human Resource Development, Govt of India.We are equally treated as Government employee. I have applied through proper channel to some other Autonomous Body under MHRD.
    Now I have tendered my Technical Resignation upon my selection to another Autonomous Body. I have accumulated approx leaves of 150 days (including EL/ HPL). As per the rule 39(2B) or so, I shall be encashing all the leaves at my credit, for which exemption prevail in line with the available provisions under section 10(10aa) of Income Tax Act, as learned from various sources.
    But my Account Officer is stating that the receipt of amount towards encashment of Earned Leave will be taxable, which is contradictory to what section 10(10AA) states i.e. the leave encashment of government employees is exempted.
    I would really appreciate if you could enlighten/ guide me on the issue.

    Reply
      1. VIJAY BOROLE

        i am a emplyee of maharashtra state power genration company (state govt undertaking ) retired form service of 38 year in june 2018 and 300day leave encashment how mutch tax exmsion for me as per 10(10AA)

        Reply
  10. Mihir Lal Dolai

    I am Mihir Lal Dolai,working in SBI .I have availed Privilege Leave encashment in that Nov month,but the Branch has deducted 30% amount and then credited my A/c .my income selling bellow 10 lakhs,as per govt rule my deduction would be 20%.So my query is regarding that what %amount is to be deducted.

    Reply
    1. TaxGuru Post author

      You are right bank can do the correction process upto 7days. After that you need to approach to concern TDS officer along with following
      1. Request letter
      2. Affidavit on Rs. 100 stamp paper stating that you have paid the TDS with incorrect TAN
      3. You also need to approach to that incorrect TAN party for their NOC
      4. Bank statement showing the payment of TDS
      5. Copy of the challan

      Reply
  11. A.sureshkumar

    Also Gst, Cst amount for lic policy premium amount. Is eligible for tax deduction under 80c,80d sir,
    Thank you,

    Reply
    1. TaxGuru Post author

      Hello A.Sureshkumar,

      The benefit under section 80C is allowed on payment basis. Section 80C does not talk anything on taxes paid along with the premium to insurance company, in my opinion you can take the benefit in section 80C. For section 80D you need to strictly go by 80D certificate issued by insurance company. If certificate is inclusive of taxes then you can claim that.

      Reply
  12. VIJAY BOROLE

    i am a emplyee of maharashtra state power genration company (state govt undertaking ) retired form service of 38 year in june 2018 and 300day leave encashment how mutch tax exmsion for me as per 10(10AA)

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *