An employee can have various leaves assigned to him when working in an organisation. In case employee doesn’t avail all the leaves, he can choose to encash the remaining leaves which were allowed to be taken but were not availed by the employee. The number of leaves that can be encashed depends on employer and can differ from organisation to organisation.
Since the employee is earning leave encashment as a salary for number of leave days which he could have taken but didn’t, the amount received would be liable for tax under head ‘Income from Salary’.
Computation of taxable amount (u/s 10(10AA)):
In case you getting your leaves encashed while being in service with the same employer, the leave encashment amount is fully taxable.
However, in case of retirement or resignation, certain amount of leave encashment received will be applicable for tax exemption, and only the remaining amount (after exemption) will be taxable.
For all Employees other than (State & Central) govt. employees: The least of the following shall be considered for exemption:
- Actual Leave encashment received
- 10 months average salary (Basic + Dearness Allowance + #) computed on the basis of the average salary (Basic + Dearness Allowance + #) drawn by the employee during the period of 10 months immediately preceding his retirement/resignation.
- Cash equivalent of un-availed leaves, calculated on the basis of maximum 30 days leave, for every year of completed service.
- Maximum limit of Rs. 3,00,000*
# Any commission based on fixed percentage of turnover achieved by the employee.
* If the employee has received leave encashment in past years and had availed exemption, the limit of Rs. 3,00,000 shall be reduced by the amount of exemption availed earlier.
For govt employees (State & Central): Leave encashment received by a Govt employee, is fully tax exempted, i.e., no tax would be levied on leave encashment amount.
If you are having trouble with tax calculation on leave encashment on Keka, write to firstname.lastname@example.org.