Getting paid for regular attendance is nothing short of a dream come true. The Finance Bill 2023 proposed the raising of tax exemption on encashment of the leaves not sought by non-government salaried employees to ₹25 lakh from ₹3 lakh.
While announcing the Union Budget for the year 2023, India’s Finance Minister Nirmala Sitharaman said, “The limit of ₹3 lakh for tax exemption on leave encashment on the retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was ₹30,000 pm. In line with the increase in government salaries, I am proposing to increase this limit to ₹25 lakh.”
This implies that retired employees seeking encashment of their leaves not taken during their service must realize that the amount received is not subject to tax. Nevertheless, the eligibility for exemption applies solely to amounts received upon retirement from employment rather than those cashed out while still employed. Courts have clarified that this retirement need not specifically occur at the age of superannuation but also includes cases where individuals leave their employment voluntarily by resigning.
Aman Kumar Mittal, Chartered Accountant, Aman Kumar Mittal & Co said, “Leave encashment for non-govt employees is partially taxable and partially exempt. The Budget 2023 has increased the maximum exemption u/s 10(10AA) to ₹25 lakhs from the existing ₹3 lakhs.”
“The calculation of leave encashment is as under
A. Leave Encashment Received: ₹XXXXX
B. Less: Exemption u/s 10(10AA): Least of the following
- Max exemption amount is ₹25 lakhs
- Actual leave encashment received
- Average salary every month of the last 10 months × 10
- Salary per day × unutilized leaves (Max 30 days per year)
C. Leave Encashment Taxable (A-B): ₹XXX,” added Mittal.
For central or state government employees, the entire sum received as leave encashment is exempt from taxation, without any restrictions or conditions. Conversely, other employees must adhere to specific conditions and limits to qualify for the exemption.
For non-government employees, one condition to qualify for the exemption is that the leave entitlement used to calculate the exemption cannot exceed 30 days for every year spent in service.
Also, if leave encashment was previously claimed upon retirement from another employer, only the remaining balance within the specified limit would be eligible for exemption upon subsequent retirement.
Given how the new tax slab rates have irked many taxpayers, especially, those salaried, the increased tax-exempt status of encashed leaves came as a breather for many.