Employees are eligible for various leave while in service .Employee usually take some leave during the year as per company policy and balance leave will remain unavailed for the year. For example employee is eligible for 20 leave and he avail only 5 leave during the year hence 15 leave will remain unavailed. Generally encashement of accumulated leave can be done only at the time of leaving the company by way of resignation or retirement.Always one wonder regarding Exemption of Leave Encashment and how much one can get encashment after exemption.
Encahment of Leave during the service is fully taxable hence no exemption is allowed.
Exemption of Leave Encashment at the time of retirement/resignation:
1. Central and State Government Employee: As per section 10(10AA)(i) of income tax act , leave encashment received by State and Central Government Employee at time of retirement or resignation is fully exempt from tax.
2. Other than Central and State Government employee: Minimum of four amount is allowed as Exemption from Leave Salary Encashment:
i. Leave encashment actually received by employee
ii. 10 Months’ average salary
iii.Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of actual service rendered by employee from whose service he/she has retired or resigned. cash equivalent would be on the basis of average salary.
iv. Amount specified by Government . i.e. Rs. 3,00,000
Salary + D.A.(to the extent it is part of retirement benefit) + commission based on fixed percentage of turnover achieved by him is considered for calculation of exemption of leave encashment
Average Salary Meaning:
Average salary of last 10 Months drawn by employee immediately preceding his retirement or resignation.