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Leave Encashment [Section-10(10AA)] for Computing Salary Income

 

As per terms of employment, generally, an employee is granted certain period of leave(s) on yearly basis. Such leave(s) may be casual leaves, medical leaves and privileged leaves or earned leaves. Generally, an employee can accumulates his medical leaves and privileged leaves and can avail such leaves in subsequent years as per his necessity. However, in some cases, an employee can even encash his accumulated privileged/earned leaves and can get salary for the said period of leave. Such receipt of salary by an employee from his employer in lieu of his accumulated leaves is called “Leave Encashment”.

Such encashment can be done by an employee either during the service or at the time of leaving job due to retirement or any other reason. However, in case of death of an employee, the salary for his/her accumulated leave is given to his/her legal heirs.
 
Tax Treatment of Leave Encashment

(A)     Leave Encashment during service.

Any encashment of leaves by an employee during continuance of service is “fully taxable” for all employees whether government employees or non- government employees. Such encashment may either be of current year leaves or of past accumulated leaves. It is taxable as salary income of the employee for the previous year in which amount is received by employee.

(B)       Leave Encashment on Leaving job/Retirement

(BI)          For Government employees.         Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be “fully exempt” u/s 10(10AA)(i).

Meaiuing of Government Employee. Government employee includes

(a) Employees of Central Government

(b) Employees of state Government

Note : Employees of local authority, statutory corporation and public sector undertakings are not regarded as government employees for this purpose.

(BII)        For Non-Government employees. Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt upto the least of following amounts u/s 10 (10AA)(ii)

  1. Maximum 10 months salary on the basis of average salary drawn during 10 months immediately preceeding his retirement/leaving job otherwise.

  2. Salary for approved period of leave standing to his credit at the time of retirement/leaving job otherwise.

  3. Maximum notified limit 3,00,000 (As specified by the central government)

  4. Actual amount received as leave encashment and balance shall be taxable

Important Notes:

 1. Meaning of Non-Government Employees. Non-government employees includes all employees other than employees of Central Government and State Government.

2. Meaning of Salary. It shall mean Basic Salary, Dearness Allowance (if given under the terms of employment or if it enters into pay for retirement benefits) and commission as fixed percentage of turnover achieved by him. Then,

Salary = Basic Salary + D.A. (enters)/D.P + Commission on Turnover

3. Calculation of Average Salary of 10 months. Average salary of 10 months is to be calculated on the basis of the average salary drawn by the employee during the period of 10 months immediately preceeding his retirement whether on superannuation or otherwise.

Example 1:  If employee retires on December 31, 20 1-3 then average salary of 10 months will be calculated by taking salary drawn during March 1, 2013 to December 31, 2013:

Example 2 : If employee retires on December 15, 2013 then average salary of 10 months will be calculated by taking salary drawn during the period March 16, 2013 to December
15, 2013.

4. Meaning of Approved Period of Leave

Approved Period of Leave = 30 days/i month leave for every completed year of service. Note. Service period in fraction of the year (whatsoever it may be) shall be ignored, i.e., shall not be taken into consideration while calculating total approved period of leave on the basis of service period.

5. Meaning of Approved leave(s) left on leaving job

It shall be calculated as follows :                                                                

The approved leave(s) on the basis of completed year of service                = x x x x         

Less Leave(s) taken during service                                                              =      x x                                                                                                                                                                     x x x x
Less Leave(s)  encashed during service                                                      =      x x

Approved leave(s) left on leaving job                                                         = x x x x

6. Whole life exemption limit. The notified maximum exemption limit of ` 3,00,000 is a whole life exemption limit for an employee in respect of leave encashment received at the time of leaving job. It can be explained as follows :

(a)       If employee receives leave encashment for the 1st time in his life at the time of leaving job: While calculating exemption, the maximum notified limit of ` 3,00,000 shall be applicable and he shall be granted exemption as per the least of 4 limits.

(b)        If employee receives leave encashment for the second/third or subsequent times: While calculating exemption in respect of leave encashment on subsequent occasions, the maximum notified exemption limit shall be reduced by the exemption claimed in the past.

7. Receipt of leave encashment simultaneously from two or more employers in same P.Y.

In such a case, the maximum exemption in respect of leave encashment received from all the employers cannot exceed the maximum notified limit of ` 3,00,000.

8. Relief u/s 89(1). In respect of taxable leave encashment included in salary income of any previous year, the employee is entitled to claim relief u/s 89(1).

C. Leave Encashment after death.

In case the amount of leave encashment is given to legal heirs of deceased employee, it will be fully exempt.

 
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Perquisite in respect of free supply of gas, electric energy, water supply [Rule 3(4)]

Free Educational Facilities to Children of Employee’s Household [Rule 3(5)]

Facility of Free or Concessional Private Journey to an employee by the employer engaged in the carriage of passengers or goods [Rule 3(6)]
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Receipts treated as Profit in Lieu of Salary [ Section 17(3)]

Leave Travel Concessional (LTC) Assistance [Section 10(5)]

Death-Cum-Retirement Gratuity [Section 10(10)]

Non-Government employees receiving gratuity under payment of Gratuity Act, 1972 [POGA]

Non-Government Employees receiving gratuity (Not covered under payment of Gratuity Act)

PENSION [Monthly and Commuted] for Computing Salary Income

Leave Encashment [Section 10(10AA)] for Computing Salary Income

Any amount received as compensation on termination of employment [Section-10B]

Any amount received on voluntary retirement [Section 10(10C)]

Payment received from Recognised Provident Fund [Section 10(12)]

Any payment from Superannuation Fund [Section 10(13)]

 
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Entertainment Allowance to Government Employees [Section-16(ii)]

Tax on Employment Under Section - 16(iii)

 
DEDUCTIONS U/S 80C OUT OF GROSS TOTAL INCOME

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Qualifying Amount ( Q.A.) for Deduction U/s 80C

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