Tuesday, January 5, 2010

Exemption of Leave Encashment

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Exemption of Leave Encashment is available under section 10(10AA) as per Income Tax Act

Any payment received by an employee of Central/State Govt. as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise. But in case of other employees the exemption is available minimum of the following amounts namely :

a) Leave encasehment actually received.

b) Cash equivalent of earned leave (not excedding 30 days for each year of service) at his credit on retirement.

c) Ten months average salary(salary for this purpose includes D.A. but excludes other allowances and perquisites)- average of salary drawn during ten months preceding his retirement, whether on superanuation of otherwise.

d) Monetary linit as laid down below.
Period of Retirement
Amount (in Rs.)
01.01.1988 to 31.03.1995
01.04.1995 to 30.06.1995
01.07.1995 to 30.06.1997
01.07.1997 to 31.03.1998
01.04.1998 onwards
(Least of above value of a,b,c,d will be exempted)

Where the employee receives leave salary from more than one employer in the previous year, or where an employee receives such payment in one or more precious years, and such payment was exempt exemption will not exceed the limits specified above as reduced by the amount which has already been exempted from income tax in the same previous year or any earlier previous year or years.

Special Note :- Leave encashment is exempt from income tax only if it is received on the occasion of retirement whether on superannuation or otherwise. Leave encashment received while in service (say, at the time of availing LTC) is taxable. However, in terms of Board circular No. 431 dated 12.9.1985 encashment of leave salary while in service is allowed to be spread over under the provisions of section 89(1) so as to avail the relief which is now available at source.

Receipt of cash equivalent of leave salary that the deceased Government employee would have got if he had gone on earned leave by the family of the deceased employee is not liable to income tax.

The leave salary paid to the legal heirs of the deceased employee in respect of privilege leave standing to the credit of such employee at the time of his/her death is not taxable as salary.

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