According to Nirmala Sitharaman in her Budget speech, “The limit of Rs.3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was Rs.30,000/- pm. In line with the increase in government salaries, I am proposing to increase this limit to Rs.25 lakh.”
Leave Encashment
If a person is employed in the private sector, their leave encashment following retirement or resignation is taxable as “Income from Salary” under Section 10 (10AA)(ii). However, Section 10 provides for some tax exemptions (10AA), according to the income tax department’s website.
Any payment received as leave encashment at the time of retirement or on leaving job otherwise shall be exempt up to the least of following amounts Under Section 10 (10AA)(ii). The limit is now increased to Rs.25 lakh from earlier Rs.3 lakh.
As per the Income tax website, “In case of non-Government employees (i.e., other than the Central or the State Government employees), leave salary exempt from tax under section 10(10AA) (ii) will be least of the following:
1. Period of earned leave in months (*) × Average monthly salary (**)
2. Average monthly salary (**) × 10 (i.e., 10 months’ average salary)
3. Maximum amount as specified by the Central Government i.e., Rs. 3,00,000 Different amounts (i.e., ceiling limits) are specified by the Government for different years. However, for employees retiring after April 1, 1998 specified ceiling limit is Rs.3,00,000.
4. Leave encashment actually received at the time of retirement.”
Meaning of average monthly salary
According to the Income tax website, “Average monthly salary means average salary drawn in past ten months immediately preceding the retirement (i.e., the day of retirement). Salary for this purpose will include following only:
Basic salary
Dearness allowance considered while computing retirement benefits (i.e. DA in terms),Commission based on fixed percentage of turnover achieved by the employee. Apart from above items, salary for this purpose does not include any other allowance or perquisites.”
