Tax Exemption Limit On Leave Encashment Increased To Rs 25 Lakh For Non-Govt Employees

New Delhi: The Union Finance ministry has notified the increased ceiling for encashment of earned leave that is exempt from income tax through a notification dated May 24, 2023.

In line with the 2023 Budget proposal of Finance minister Nirmala Sitharaman, the revised ceiling will come into effect from April 1, 2023.

“In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs 25,00,000 (twenty-five lakh rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise. This notification shall be deemed to have come into force with effect from the 1st day of April, 2023,” stated the Finance ministry circular.

Non-government employees will thus benefit from enhanced tax exemptions for leave encashment paid against accumulated leave balances over time.

“The limit of Rs 3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was Rs 30,000 per month. In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lakh,” Sitharaman had stated in her Budget speech.

For those working in the private sector, leave encashment after retirement or resignation is taxable as ‘Income from Salary.’ They can, however, claim an exemption under Section 10 (10AA)(ii) of the Income-Tax Act.

Any payment received as leave encashment at the time of retirement or otherwise upon leaving the work is exempt up to the least of the sums listed in Section 10 (10AA)(ii). The ceiling has now been increased to Rs 25 lakh from the earlier Rs 3 lakh.

According to the Income tax website, in case of non-Government employees (i.e., other than the Central or the State Government employees), leave salary exempt from tax under section 10(10AA) (ii) will be least of the following:

1. Period of earned leave in months (*) × Average monthly salary (**)

2. Average monthly salary (**) × 10 (i.e., 10 months’ average salary)

3. Maximum amount as specified by the Central Government i.e., Rs. 3,00,000 Different amounts (i.e., ceiling limits) are specified by the Government for different years.

4. Leave encashment actually received at the time of retirement.