Leave salary
- Leave salary means en -cashment of unutilised leave of assessee.
- The term “leave encashment” refers to compensation or payment made in return for unused leaves. Employees can cash in their accumulated leave at any moment during their employment, including when they retire, continue to work, or quit.
- In order to get tax relief for leave encashment during the employment, the employee should fill form 10E. This form is available on the e-portal of the income tax department and once filled can be submitted online. The only tax paid during the encashment will be income tax from salary.
Exemption and its calculation
Leave salary is fully taxable for all employees during the employment.
Leave salary at the time of retirement u/s 10(10AA)
Leave salary at teh time of retirement is exempt u/S 10(10AA) with the following calculations
- Leave credit x Average salary per month
- 10 months x Average Salary per month
- Actual amount received
- Amount allowed maximum Rs 3,00,000
Which ever is lower.
Average Salary
Average salary means it is calculated as follows
| Particulars | Amount |
| Average Basic salary of last 10 months | xxx |
| Average Dearness Allowance of last 10 months | xxx |
| Average Turn Over Commission of last 10 months | xxx |
| Average Salary Per Month | xxxx |
Leave Credit
- Leave credit = Leave allowed – Leave Taken
- Maximum 30 days allowed as leave for every completed year
Example
Naveen Koralapara has retired from the organisation after serving for a period of 20 years. He was entitled to 32 days of paid leave in a year. But he exhausted 270 leaves and left with 365 days of leave. He draws basic salary + D.A INR 30000 per month at the time of retirement. He received leave encashment of INR 365000 (365*1000).
Taxable leave encashment will be:
- Actual amount received : INR 365000
- Average Salary of 10 months: 300000
- 30 leaves per year allowed (30*20 – actual leave taken)*1000 = 325000
- Maximum Allowed: 300000
Which ever is lower is allowed as exemption.
So, Lower of all is exempt i.e. INR 300000
Therefore, taxable leave encashment will be 65000(365000-300000)
