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Is Leave Salary/ Encashment Taxable In India Or Not?

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If you are working in an office then you must know about Leave Salary or Leave encashment, actually every employee is allowed to have 2 or so on leave per month (vary from company to company) and at the end of year or when they get retirement or resign from the company then you can cash your leaves which are there in your account. This is also called Earned Leave (PL).

There are certain rules regarding whether your leave salary will be taxable or not, lets take a look on the rules prescribed by the Government of India.

Tax On Leave Salary Received During Service

If an employee is working in a company and get leave salary by cashing his left over salary at the end of year or so on then its fully taxable as per your Income Tax Slab in which he/she falls in.

Tax On Leave Salary At The Time Of Retirement

If you are getting leave salary when you get retirement or leave company then Government has prescribed different rules for different employees.

  • Tax On Leave Salary For Government (Central Or State) Employees :- If you are an Central Or State Government Employee then your leave salary will be exempt from the tax u/s 10(10AA)(i), it should be noted that here Government employees means central and state government servant only local authorities employees like Municipality employees wont come under it. There is no limit on the leave salary received by the employees, full leave salary received by you is fully exempted from the tax.
  • Tax On Leave Salary In Case Of Private Employees :- If you are working with an private company then things are little tough for you, the minimum amount of the following will be exempted from the tax for you :-
    • Leave encashment Actually received,
    • Last 10 months’ average salary
    • Cash equal to leaves available in your account, Or
    • 3 Lakhs

Tax On Leave Salary

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It should be noted that least of above will get exempted from tax but the maximum limit is also 3 Lakhs.

Average Salary – Average Salary mean your Basic Pay + DA (Dearness Allowance) + Commission, your preceding 10 months salary is taken into consideration.

Cash Equals To Leaves :- Here you should note that maximum leaves allowed in your account is 30 per year, no matter how much salary you had in your account but only 30 per year is counted.

3 Lakh Limit :- Here is another twist for you, 3 Lakh INR limit is a lifetime limit, for eg if you are working with company X and resign from there and get 1.5 Lakh as your Leave Salary, then you join company B and after some time you resign from there too and get 2 Lakh as leave salary and the join company C and at the time of retirement and get 3 Lakh as leave salary.

Now here when you leave company B you can only claim exemption of 1.5 lakh only and need to pay tax on 50,000, because you had already claim exemption on 1.5 Lakh when you left company A, and when you leave company C you wont get any exemption on tax and have to pay tax on 3 Lakh because you had already claimed 3 lakh limit exemption (1.5 lakh from company A and 1.5 Lakh from Company B).

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