Leave Salary encashment Exemption Calculation/calculator

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Dear Friends ,
In this post we are discussing issues and provisions related to Leave Encashment /Leave salary given to employees and Tax due on it and How much of such amount is taxable/exempted under Income Tax Act.

Meaning of Earned Leave
Normally in pay package of the employee two day or so is allowed as leave per month  and if this leave is not availed then it will be accumulated subject to certain maximum limit and at the time of retirement/otherwise or on leaving the employer, pay equivalent to leave remaining unutilised in the employee account will be paid to employee. (rules varies from organisation to organisation).This type of leave is called Earned Leave and amount received in lieu of this unutilised amount is called leave salary/leave encashment.

(A)Leave salary received by any employee during the period of  service.
  • Leave salary received by any employee during the period of  service is fully Taxable.however relief under section 89 read with rule 21A can be claimed (Circular no 431 Dated September 12,1985)
(B)Leave Salary to At the time of Retirement /superannuation or otherwise.
 (i) Leave salary to Central/State Government employee

  •  Leave salary given to Central/State Government employees at the time of retirement /superannuation in respect of period of earned leave at his credit ,is fully exempted.{section 10(10AA)(i)}
(ii)Leave salary given to  other employee (non Central/State Government employee is exempted as per detail below.{section 10(10AA)(ii)}
Least of following will be exempted.
  1. Leave encashment Actually received.
  2. Last 10 Month average salary .(average salary explained below)
  3. Maximum amount fixed by the Government from time to time (given below)
  4. Cash equivalent of salary in respect of the period of earned leave to the credit of the employee only at the time of retirement whether on superannuation or otherwise calculated maximum by 30 days maximum for every year of actual service rendered to employer from whose he has retired.
Maximum Amount Specified to be exempted From time to time:The amount has been last revised in 1998 and after that period DA of the employee has been increased by 100 % but this amount has not been increased then so even by rate of inflation also this amount should increased to 6.00 lacs at least.what do you think????.It seems from the cahrt that in period 1986 to 1987 the maximum amount was linked with the DA increase but after that periodical review has been started. In my view this amount should be linked to DA increase and should be declared at least in one year like Cost inflation index used for capital gain calculation.



Meaning of Average Salary :Average Salary drawn during the period of 10 Months immediately preceding the retirement /superannuation .Salary means basic pay plus dearness allowance if term of payment so allowed ,plus commission based on fixed % of turnover achieved by the employee as per term of employment.

(iii)Leave Salary paid to Legal heirs of deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable .

(iv)Leave salary received by family of Government employee who died in harness ,is not taxable in hands of the recipient.

Scope of this sction also applicable at voluntary retirement as state by Madras High Court in CIT Vs. R.V.Shahney(1986) 159 ITR160 .

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