Is Leave Encashment Taxable as Salary?
An employee is entitled to different leaves such as Medical Leave, Casual leave or official holidays. Some of these leaves can be carried forward to the next year while some of them can not be carried forward at all. If the employer’s policy allows, an employee can encash the unclaimed leaves.
So, an employee can en cash the leaves if following conditions are fulfilled
- He/she was unable to claim the leaves &
- The employer’s leave en-cashment policy allows the en-cashment of such leaves.
The employer can encash the accumulated leaves at the time of retirement or during the continuation of the service.
Taxability of Leave Encashment:
- Leave encashment received during the continuation of the service by Government or non-Government employees will be chargeable to tax in the year of encashment.
Illustration: Trisha is working for an MNC and she is entitled to 25 days leave per year. She has 200 days of unclaimed leaves in her account. During the FY 2015-16, she encashed leaves of 50 days and received Rs. 50,000 on account of leave encashment. So the amount of Rs. 50,000 towards leave encashment is during the continuation of her service and thus it will be chargeable to tax during AY 2016-17, under the head salary.
Encashment of leave at the time of retirement can be divided into two situations:
- Leave encashment at the time of retirement in case of Central or State Government employees is exempt from tax as per the Income Tax Act.
- Leave encashment at the time of retirement in case of non government is exempt to a certain extent. The least amount of the following shall be exempt from tax:
|1||Leave encashment actually received|
|2||10 months’ average salary = Average monthly salary x 10|
|3||Period of earned leave in months x Average monthly salary|
|4||Maximum amount specified by the Central Government = Rs. 3,00,000|
Some important points to be kept in mind:
- Average monthly salary means for last 10 months immediately before the retirement. Salary for this purpose will include basic salary + dearness allowance + any commission earned as fixed percentage of the turnover.
- If the employee receives leave encashment from more than one employer in the same year, than the maximum exemption amount can not exceed Rs. 3,00,000 specified by the Central Government
- Where the employee has claimed exemption of leave encashment in the earlier years, than the ceiling limit of Rs. 3,00,000 will be reduced by such amount which was claimed earlier.
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