Whenever you receive a corpus amount from your employer, the first thing that comes to mind is tax, which majorly happens in the case of retirement or partial withdrawal from savings, like PPF or NPS. However, under various retirement savings plans, the tax exemption limit hasn’t been increased since its launch, when inflation rates have increased more than 2 to 3 times since the last decade.
The government recognised the same retirement corpus which needed to be revised, named leave encashment, let’s know everything about the same.
What is leave encashment?
There are two types of employees in every office, one who avails all the leaves given to them, and the other ones who are hard-working and do not take leaves to earn money in exchange for overtime. Employers are always happy with the latter types of employees, and award them with the corpus as a leave encashment policy.
Basically, leave encashment is the amount of corpus received for the leaves not taken by you, as an employee, which can also be said as paid leave. When you work during times of paid leave, you can convert it into cash, and such a conversion is known as leave encashment.
Taxation of leave encashment policy
The tax liability in the hands of employees is as follows:
- Leave encashment received, or withdrawn during the time of employment is fully taxable in the hands of employees, whether you are a government employee or non-government.
- Leave encashment received at the time of retirement in the case of the government employee is fully exempt in the hands of the employee.
- Leave encashment money received by the non-government employee at the retirement or resignation is exempted from least of the following:
- The actual amount of leave encashment received by the employee.
- The maximum exemption limit is ₹25 lakhs.
- Ten months’ salary on the basis of the average salary of the last 10 months preceding retirement.
- Cash equivalent of unavailed leave based on the last 10 months' average salary to his credit at the time of retirement. (Earned leave cannot exceed 30 days for every year of actual service)
What has changed in the budget for 2023?
The maximum exemption limit of ₹25 lakhs is increased from ₹3 lakhs in the 2023 budget, which has not increased since the introduction of the policy by the labour law. The government has recognised the fact that the amount of exemption has become quite impractical in terms of tax relief.
Leave encashment policy is exempted only when you do not withdraw the corpus in the middle of the employment and utilise it for the purpose of retirement planning. Personal financial planning can be done in a way that helps you in securing your future financially post-retirement.
If you are entitled to get a leave encashment policy from your employer, it becomes easy for you to plan retirement even if you are not able to invest for the same. However, do not treat it as a retirement, always plan ahead of your requirements.
Anushka Trivedi is a freelance financial content writer. She can be reached at anushkatrivedi.com