Taxability of leave encashment

The exemption is upto Rs 3 Lakhs in pursuance of notification issued u/s 10(10AA)(ii). The balance is taxable.

The exemption us/ 10(10AA)(i) is without limit and is applicable only to the employees of Central Government or a State Government.

The exemption us/ 10(10AA)(ii) is with limit of Rs 3 Lakhs and is applicable to an employee, other than an employee of Central Government or a State Government.

The employees of PSUs are not Government employees for the purpose of Income Tax Act, as they are separate legal entities. Hence, the restriction of Rs 3 Lakh will apply in your case.

Payment from an Approved Superannuation Fund will be exempt provided the payment is made in the circumstances specified in the section viz. death, retirement and incapacitation.

Hi Mr. Krishnan,

Earned Leave encashment is fully exempt only for Direct employees of Central and State Government (If received after retirement or superannuation).

PSU employees are not covered under the full exemption. So, the Leave salary will be exempt to the extent of the least of the following

1) Rs 3,00,000

2) Leave encashment amount actually received

3) 10 months’ salary (on the basis of average salary of last 10 months)

4) Cash equivalent to leave to the credit of employee at time of retirement

So, in your case, actual leave encashment received is Rs. 10 Lakhs. Assuming other two conditions result in amount exceeding Rs. 3 Lakhs, it looks like your employer is correct in calculating the exemption

Dear Krishnan,

For the purpose of income tax, PSU is not considered as government employer.

Accordingly, you will get exemption only Upto 3 lacs.

Please feel free to call/revert in case of any doubts

Thanks and Regards

Abhishek Dugar

CA CS B.Com

hi,

Encashment of leave means that employee will receive the cash for leaves which are not taken by the employees. Employee can encash his leaves during the course of employment but this amount will be fully taxable or he can encash at the time of retirement but he will get some exemptions:

These are divided into two categories:

(i) Government Employees (Central and State Government only): Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by a Government employee, is fully exempt from tax.

(ii) Other Employees: Encashment of accumulated leave at the time of retirement , whether on superannuation or otherwise, received by other employees (including employees of Local Authorities and PSU) is exempt to the extent of the minimum of the following amounts:

a. Rs. 3,00,000/-

b. Ten months average salary;

c. Cash equivalent of unavailed leave calculated on the basis of average salary of maximum 30 days leave for every year of actual services rendered to the employer from whose service he has retired.

So as per above explanation PSU falls under other employees. and on that basis Minmum Rs 3 Lakhs has been considered as exemption considering that was the minimum of the above three calculations in your case.

Hello Sir,

Your employer company is correct in giving you a deduction of Rs.300000 only and offering the balance Rs.7 Lacs to tax, as PSU does not fall under the bracket of Central or State Government and hence you are not eligible for the benefit of the entire amount.

Trust this clarifies your query.

Feel free to call / get back in case of further clarifications.

Thanking You.

Regards,

Rohit R Sharma

BCOM, ACA, LLB-GEN, CERT. FAFP