Is leave encashment taxable?

A salaried employee, whether in government sector or private, is entitled to various types of leaves each year during the term of his employment. Casual leaves, sick leaves, earned leaves, privileged leaves etc. are some such leaves.

While some of these leaves can be carried forward to the next year, some cannot. If an employee doesn’t avail the leaves he is entitled to, he may also receive an encashment for the leaves.

The number of leaves an employee can avail and the leave encashment allowed are dependent on the employer. The amount received as leave encashment is a perquisite to the employee and the tax implications are dependent on whether the leaves are encashed during the course of employment or at the time of retirement.

The amount received during the course of employment would be liable to tax under head “Income from Salary”. However, at the time of filing for returns, exemptions are allowed on a certain amount. The taxation is also dependent on whether an individual is a government (Centre or State) employee or a non-government employee. Let’s take a look at the different scenarios.

The Leave encashment done at the time of retirement

For leave encashment at the time of retirement, an employee is entitled to exemptions under Section 10(10AA). The amount, which is exempted, is different for government and non- government employees. For government employees, leave encashment at the time of retirement is exempted from taxes entirely.

For non-government employees, a certain part of the amount is exempted from tax.  The least of the following is exempted:

• Average monthly salary of the last 10 months
• The maximum amount specified by the government i.e. Rs 3,00,000
• Actual leave encashment received
• Cash equivalent of earned leaves calculated subject to a maximum of 30 days leave for every year of completed service.

The remaining amount received as leave encashment would be liable to tax as per the income-tax slab rates.

The leave encashment during the service

Some points to remember about the tax on leave encashment:

Salary for the purpose of computation would include basic salary, dearness allowance and commission received as a fixed percentage of the yearly turnover. All the other allowances are excluded for such purpose.
Average salary of 10 months meaning the salary received in the last 10 months prior to retirement.
If the employee had encashed leaves in any of the previous year/years and availed exemption for it, the limit of '3 lakh would be reduced by the amount of exemption claimed earlier.
In case of resignation by the employee, the taxation applicable would be the same as that for retirement.
In case of death of the employee, the leave encashment would be received
by his/her legal heir or nominee. The amount would be completely exempted from taxes for both government and non-government employees.

(The writer is the CEO of BankBazaar.com)