As per section 10(10AA), leave encashment by a Government employee at the time of retirement (whether on superannuation or otherwise) is exempt from tax. In the hands of non-Government employee exemption will be least of the following:
1. Period of earned leave standing to the credit in the employee’s account at the time of retirement (*) × Average monthly salary ($).
2. Average monthly salary ($) × 10 (i.e., 10 months’ average salary).
3. Maximum amount as specified by the Government, i.e., Rs. 3,00,000.
4. Leave encashment actually received at the time of retirement.
(*) Leave credit to the account of the employee at the time of retirement should be restricted to 30 days per year of service if leave entitlement as per service rules exceeds 30 days per year of actual service.
($) Salary for the above purpose means average salary drawn in the past ten months immediately preceding the retirement (i.e., preceding the day of retirement) and will include basic salary, dearness allowance (if considered for computing all the retirement benefits) and commission based on fixed percentage of turnover achieved by the employee.
Apart from the above items, salary for this purpose does not include any other allowances or perquisites.