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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. GOUTAM CHOWDHURY

    I was a PSU employee, superannuated from service on 29.2.16. I have leave credit for encashment. It is expected that approval from higher authority for payment of leave encashment will be received in April’16. So there is shifting of assessment year- leave credited and payable in 2015-16 (AY 2016-17) leave amount will be paid in 2016-17 (AY 2017-18). Kindly confirm in which year TDS will be considered.

  2. Sudhiranjan Nayak

    Being a PSU employee is leave salary taxable ?

    • Ashok Kumar Verma

      I have retired from the deemed deputaion service of Paschimanchal Vidyut Vitran Nigam Limited a holding company of Uttar Pradesh Power corporation Ltd., Lucknow (A PSU) Virtually I had been on the incumbency of the Uttar Pradesh Power Corporation Ltd., Lucknow. I am likely to receive the amount of leave encashment on retirement. I want to know the position of tax laibility of the same under the provisions of Income Tax Act presently prevailing. Moreover, I want to know the rate of tax applicable on the same. I have to submit in the reference that I will be receiving my pension from the government treasury w.e.f. 04/16 onward as per decision taken by the U.P.Government.

      • Prateek Agarwal

        If you are a government employee then such leave encashment is fully exempt.
        If you are not a government employee then exemption is calculated as stated above and the rest of amount is added to the total income and taxable as per tax slab.

  3. As Delhi University is a central university, are it’s teachers treated at par with central govt employees for purposes of leave encasment at retirement? If yes, pls quote notification or rule and date.

  4. Prateek Tiwari

    Can employees of Uttar Pradesh Power Corporation Ltd (UPPCL) get back the tax deducted on Leave Encashment. Being an organisation of government undertaking tax is deducted on Leave Encashment. Please guide.

  5. Hemang P Soni.

    I retired from judicial department from gandhinagar diistrict court I have received Rs514520/ leave encashment. On retirement date.how much incometax I have to pay on above encashment. I am state government employee. Pl guide

    • Prateek Agarwal

      Since you are state government employee and also you received such amount on retirement, such amount is fully exempted from income tax.

  6. Ghanshyam Patel

    I retired from nationalise bank I have received Rs550000/ leave encashment. On retirement date.how much incometax I have to pay on above encashment. Pl guide

    • Prateek Agarwal

      For employee of nationalized bank leave encashment is not fully exempt.
      For calculation of exemption amount please refer the calculation as specified in this article.

  7. vitthal balkrishna gulawani

    I am retiring on 31st July 2015,i am working at MSEDCL in maharashtra state,i am receiving encashment amount of Rs 1600000, how much income is exempted as per income tax act.(semi government)

    • I am retiring on 31st May, 2012,i am working at MSEDCL in maharashtra state,i am receiving encashment amount of Rs 39,3284, how much income is exempted as per income tax act.(semi government)

      • Prateek Agarwal

        If you are a government employee then whole amount is exempt. Otherwise deduction is allowed as per above provisions.

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