Leave Encashment

For non-government employees, leave encashment received at retirement or resignation is exempt under Section 10(10AA) up to the least of four amounts: actual amount received, average salary of last 10 months × leave at credit (capped at 30 days per year of service), Rs 25 lakh (revised limit since April 2023 by CBDT notification), or 10 months' average salary. Average salary means basic + DA forming part of retirement benefit + commission as fixed percentage of turnover. Government employees get full exemption with no cap. Example: 10-month average salary Rs 80,000, 200 days leave at credit, encashment Rs 5.33 lakh. Lowest of formula values applies; document carefully at separation.

Yes, fully taxable. The Section 10(10AA) exemption applies only when leave encashment is received at the time of retirement (whether on superannuation or otherwise) for non-government employees. If you encash unused leave during ongoing service, perhaps under your company's annual policy or as a one-time perk, the entire amount is added to your salary for the year and taxed at slab rates. TDS will be deducted by the employer at marginal rate. Many employees don't realise this and find a chunk of their year-end leave payout vanishing into tax. Plan accordingly: if separation is near, deferring encashment to actual retirement saves substantial tax.

Effective from 1 April 2023, the Central Government raised the aggregate exemption ceiling for non-government salaried employees on leave encashment at retirement from the older Rs 3 lakh limit to Rs 25 lakh. The new ceiling was notified through Notification No. 31/2023 by CBDT. The Rs 25 lakh is a lifetime aggregate cap; if you've already used part of it from an earlier retirement (rare in practice but possible with multiple separations), only the unused portion remains available. The other three legs of the Section 10(10AA) test (10-month average, 30-days-per-year leave, actual amount received) still apply, and the exemption is the lowest of all four.

Average salary for the Section 10(10AA) computation is taken from the 10 months immediately preceding the date of retirement or resignation. Salary includes basic, dearness allowance to the extent it forms part of retirement benefits, and commission expressed as a fixed percentage of turnover. It excludes HRA, special allowance, bonus, perks and one-off payments. Add the eligible salary across those 10 months, divide by 10, and that's your average. So if your last 10 months' basic + eligible DA totals Rs 8 lakh, your monthly average is Rs 80,000. This figure feeds into both the 10-month-salary ceiling and the per-day leave value calculation.

Yes. Leave encashment received by Central or State Government employees at the time of retirement or superannuation is fully exempt from income tax under Section 10(10AA)(i), without any monetary cap. This applies to civil servants, defence personnel, employees of statutory bodies created by Central or State Acts, and similar government workforce. The Rs 25 lakh ceiling and the 30-days-per-year rule apply only to non-government (private sector) employees. Public sector undertakings (PSUs) and nationalised banks, despite being government-owned, are typically treated as non-government employers for this purpose, so their employees are subject to the Rs 25 lakh cap. Always check your service classification.

Yes, but partially exempt. Leave encashment received by a non-government employee on resignation (which is treated like retirement for this purpose) qualifies for Section 10(10AA) exemption, subject to the four-leg test and the Rs 25 lakh aggregate cap. So the same formula used at retirement applies at resignation: lowest of actual amount, 10-month average salary, 30 days per year of service × average daily salary, or Rs 25 lakh. The portion above the exempt amount is added to your salary income that year and taxed at slab. TDS will be deducted by the outgoing employer based on the regime opted in Form 12BB.

For non-government employees, the Section 10(10AA) formula caps leave at credit at 30 days per completed year of service, regardless of how generous your company's leave policy is or how many days you've actually accumulated. Take 18 years of service with 400 days of leave at credit on the books: the formula limit is 18 × 30 = 540 days, so all 400 days count. But if you had 600 days accumulated under a generous policy, only 540 would feed into the formula. Multiplied by your average daily salary, this gives the per-day-leave leg of the exemption test, which is then compared with the other ceilings.