Taxability on Leave Encashment

Taxability on Leave Encashment 

Taxability on Leave Encashment

As we are heading towards the end of financial year, many salaried class individuals would be wrapping up their TDS calculation for the year. As we are heading towards the end of financial year, many salaried class individuals would be wrapping up their TDS calculation for the year. Of course, TDS would depend on your income category, residential status, employment type and the salary components. Here we are going to discuss tax implications of receiving Leave encashment from employer. 

Taxability on Leave Encashment

What is Leave encashment? 

The Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017 Section 18(3) Every worker who has worked for a period of two hundred and forty days or more in an establishment during a calendar year shall be allowed during the subsequent calendar year, leave with wages for a number of days calculated at the rate of one day for every twenty days of work performed by him during the previous calendar year. 

Leave encashment is an equivalent amount received by an employee for the unutilized leaves during a tenure. Calculation of leave encashment is based on salary of the employee. 

The benefit of leave encashment may be provided by employer to employee during employment, at the time of termination of employment or at the time of retirement of employee. 

Tax Treatment of Leave Encashment 

The tax treatment of leave encashment depends on when is it availed by the employee, during employment, at retirement or termination otherwise and the nature of employer, central or state government or non government. 

1. Received during the course of employment – Where leave encashment is received during the employment then the same shall be taxed in the hands of employee under the head Salary. However the benefit of Section 89 can be availed by filing Form 10E.
2. Received at the time of retirement from Central or State Government – Leave encashment received from Central or State Government is exempt from tax u/s 10(10AA)(ii).
3. Received at the time of retirement from employer other than Central or State Government – Leave encashment received from employer other than Central or State Government is exempt to extent lowest of the following as per section 10(10AA)(ii)
4. Limit specified by Central Government by notification in Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to employee of that Government, currently the same is ₹3,00,000.
5. Payment for the period of earned leave at his credit at the time of retirement whether on superannuation, calculated on basis of 10 month average salary and where earned leave does not exceed 30 days for each year of service.

Impoters Expoters Code in India

Impoter Expoter Code in India