Explainer: Are you a salaried individual? Know how leave encashment is taxed

Sick, unpaid, and unpaid leave are often separated into these three categories among salaried employees in the working population. Employees can use their vacation balance or accrued time when they retire or leave their job, so it is not necessary to take advantage of these accrued leaves. Vacation pay guidelines and policies vary from one company to the next. Although the general rule is that leave balances are redeemable upon retirement or resignation, company policies regarding full and final payment of leave pay may differ. holiday. However, all leave taken while working is fully taxable. However, under section 89 of the Income Tax Act, it is possible to claim exemption from the holiday. For employees in the Central or State Government sector, the leave payment granted at the time of retirement or resignation is fully satisfied. In addition, non-government workers who receive the leave are not partially exempt. Let’s take a brief look from industry experts on how and when to pay taxes.

Commentary by CA Manish P. Hingar, Founder at Fintoo

Everyone who receives a salary according to the labor law is entitled to at least one annual holiday. However, not every employee is required to use all of their vacation time in a year. In fact, most employers allow employees the option of submitting unused paychecks. This leaves the employee with the balance of unused leave at the time of retirement or leaving the company as the case may be. It forces employers to compensate employees for unused vacation. Let’s take a look at the tax implications of vacation pay:

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Paying vacation taxes

Allow encashment received during service

1. Accumulated leave may be taken at the time of service or at the time of retirement or resignation.

2. All leave granted during service is fully taxable and included in ‘salary income’. However, relief under section 89 can be claimed.

Depositing money at the time of retirement or resignation

Vacation contributions received at the time of retirement or resignation are exempted in whole or in part depending on the category of an employee. This is further explained below:

1. The contribution of the employees of the Center or the State at the time of retirement or resignation is exempted.

2. The contribution of the legal heirs of the deceased employee is not exempted.

3. The contribution of non-government employees is only as per the calculation mentioned in section 10(10AA)(ii) and the balance amount if any is taxable as ‘salary income’.

Rules for Dismissing Leave for Non-Government Employees:

Mr. No. details money
(A) Leave the encashment received XXXXX
(B) Less: Redemption under Section 10(10AA) -Minimum of the following:
(C) Amount declared by the Government Rs** 3,00,000 3,00,000
(D) Actual vacation pay XXX
(E) Average salary* for the last 10 months XXX
(F) Daily salary * unused vacation (subject to a maximum of 30 days of vacation per year) for the completed work year XXX
Payment of tax – (A) – (B) XXX

Salary for this purpose includes base salary, bonus and commission based on the employee’s guaranteed turnover percentage. Fixed amount of 3,000,000 is the total amount allowed for exemption regardless of the frequency of payment of leave received by employees from different employers. If an employee uses 2,00,000,000 already at the time of first resignation, he alone is entitled to use the balance of 1,00,000 for the next exemption calculation. Therefore, an employee generally gets full exemption 3,00,000,000 for leave issued by all employers.

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Let’s look at discrimination with an analogy.

• Mr. A retires after 15.5 years of service.

• Mr. A received 35 days of annual leave from his employer, that is, a total of 542 days of leave during his entire service.

• From this Mr A has used 200 days of paid leave and has 342 days of unused leave left.

• Made Mr A basic salary + DA 33,000 per month at the time of retirement and is available 3,76,750 for leave calculated on the basis of 342 days * Rs. 1,100 (daily salary = Rs.33,000/30 days).

details Amount (in Rs)
Leave the encashment received 3,76,750[342 days * 1,100)
Less : exempt 2,75,000

Least of the following:

1. Amount notified by the Government

2. Actual leave encashment

3. Average salary for 10 months – 33,000 * 10 months

4. 1,100 * (30 days * 15 completed year of service minus 200 days of utilised leave)






Leave encashment taxable as ‘Income from salary’ 1,01,750

Comments by Dr. Suresh Surana, Founder, RSM India

Leave encashment refers to any cash received by the employees towards unutilized/credited leaves both during the tenure of their service as well as at the time of retirement. Leave encashment received by the Government employees at the time of retirement/ superannuation would be exempt from tax u/s 10(10AA) of the Income-Tax Act (hereinafter referred to as IT Act). On the other hand, employees other than Government employees receiving Leave Encashment may also avail tax exemption of section 10(10AA) of IT Act to an extent of lower of the following-

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i. Actual Amount Received; or

ii. Rs.3,00,000; or

iii. 10 months Average salary; or

iv. Unavailed Leaves*Average salary

It is pertinent to note that any leave encashment received during the tenure of service or period shall be taxable for all employees.

For the purpose of the above computation, Average salary would mean average of 10 months’ salary preceding the date of retirement and Salary would constitute Basic salary, Dearness allowance (in terms) and Commission based on a fixed percentage of turnover secured by an employee.

Leave Credit would mean Leaves Allowed reduced by Leaves Availed. IT Act Allows 30 Leaves for each completed year of service.

Comments by Sandeep Setty, Vice President of HR, Pazcare

Leave encashment is simply the amount of money obtained in exchange for the period of leaves not availed by an employee. In my previous experience, earned leave encashment was calculated based on basic salary, and was encashed during employee exit only. However, there are companies that calculate it based on gross salary.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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