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Leave salary exemption – Sec 10(10AA)

U.C Date : 25 Feb 2015

If Leave salary encashment  is received by any employee while in employment then it is fully taxable in the hands of employee. While if leave encashment is received in case of retirement or superannuation or resignation, then exemption is available upto the following limits.

In case of Central government or State government employee(excluding employees of a local authority or statutory corporation) – Fully Exempt

In case of any other employee –

Least of the following is exempt:-

  • Actual amount received
  • 3,00,000
  • 10 months average salary
  • Average salary x leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service, fraction of a year is to be ignored)

Salary includes basic pay, dearness allowance(if it forms part of the retirement benefits) and percentage wise fixed commission on turnover

Average Salary = Average of salary drawn in the last 10 months immediately preceding the date of retirement.

If leave encashment is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of leave encashment cannot exceed Rs. 3,00,000.

Leave salary paid to the legal heirs of the assessee, who dies during the employment will not be taxable.

Bare Act for Sec 10(10AA)

Bare Act for Sec 10(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

18 comments

  1. After 7 year service in one company I’m leaving current company , current company is paying my accumulated leave encashment for 30 days . in financial same year i got new job, can i get exemption?

    • Prateek Agarwal

      There is no condition that exemption is not allowed when the assesse gets a new job in same financial year. Therefore you can get such exemption as per defined limits.

  2. PREMANATH S V

    Sir, I am employee of KARNATAKA POWER CORPORATION LIMITED (STATE Government Undertaking). I have received ₹. 12,00,000 (Twlve lakhs). Can I avail tax benefit for entire amount)

    • Rohit Pithisaria

      It is fully exempted only for the employee of Central & State Government otherwise least of the following is exempt:-
      a) Actual amount received
      b) 3,00,000
      10 months average salary
      Average salary x leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service, fraction of a year is to be ignored)

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