Leave encashment

Of these, casual and sick leaves not availed during a year usually lapse while earned leaves are carried forward. Depending upon their policy, employers allow carrying earned leave forward only to a certain limit. Beyond this limit, earned leaves can also lapse. However, some employers also offer the facility of encashing the earned leaves during the continuation of service or leaving the job due to termination of service, resignation, or retirement. The money earned through encashment is also liable to be taxed. Here's everything you need to know about the income tax implication of leave encashment. Tax obligation in case of encashment of leaves in continuation of employment: Exemption on encashment of leaves is only available when an employee leaves the company. Hence, when an employee encashes their leaves to continue their services, the money earned is treated as a salary. The amount is liable to be fully taxable in your hands, and the employer will deduct the applicable tax. Tax obligation in case of encashment of leaves on resignation or retirement: The amount earned by encashing leaves by a government employee is fully exempt without any upper monetary limit or the number of days leaves are encashed. The exemption is only available to government employees and not employees working in government companies or undertakings. So, the exemption rules may not apply to employees in government banks, insurance companies, and power generation companies. Employees working in t...

In line with the budget 2023 proposal, the finance ministry has notified the increased ceiling for encashment of earned leave that is exempt from income tax via a notification dated May 24, 2023. This will come into effect from April 1, 2023 “In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs. 25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise.This notification shall be deemed to have come into force with effect from the 1st day of April, 202,” stated the finance ministry circular 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. 4. Leave encashment actually received at the time of retirement.” Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp.

As per labour laws, every employed person is entitled to a minimum number of paid leaves annually. Nonetheless, an employee doesn’t need to utilise all of their allotted leave days within a single year. Several employers offer the option for employees to carry forward any unused paid leave to the subsequent year. Inevitably, this results in the employee having a remaining balance of unused leave when retiring or resigning from the company. As a result, the employer is obligated to provide compensation for the unused paid leave, which is commonly referred to as leave encashment. Taxation of Leave Encashment: Indeed, according to the law, leave encashment is subject to taxation. When an employee receives leave encashment during their employment, the amount is considered part of their “income from salary". However, under Section 89 of the Income Tax Act, one can avail of certain tax benefits. To claim tax relief for leave encashment, it is necessary to complete Form 10E. Tax obligations when leaves are encashed while continuing employment: The exemption for leave encashment is applicable only upon an employee’s resignation from the company. Therefore, if an employee decides to exchange their accumulated leaves for cash while remaining employed, the received amount is considered as part of their salary. The entire sum earned is subject to taxation, and the employer will deduct the applicable taxes accordingly. Tax obligation upon the encashment of leaves during resignation or ...

In the organised sector, employees are allowed various categories of paid leaves like sick leave, casual leave and privilege leave. Employees are allowed to carry forward some categories of paid leaves whereas other leaves not availed during the year simply lapse. Employers generally allow employees to carry forward their privilege leave only up to a certain limit, beyond which this leave also lapses. Again, some employers allow their employees to encash some of accumulated leaves either during the continuance of their employment or at the time of leaving their job either on resignation or at the time of reaching the age of superannuation. Income Tax Return (ITR) e-filing for AY 2023-24: ITR-1, ITR-4 enabled filing in online mode Tax treatment of encashment of leave at the time of retirement or on resignation A) Rules applicable to government employee Income tax laws allow certain exemptions in respect of the money received for encashment of leave at the time of leaving the job. The rules are different for government employees whether Central government or state government and other employees. For government employees, the money received for encashment of leave is fully exempt without there being any upper monetary limit or as to the number of days leave encashed. Also Read: Please note that the exemption is available only to the government employees and not to those who are working in companies owned by governments. So, the exemption is available to employees working in r...

In the organised sector, employees are allowed various categories of paid leaves like sick leave, casual leave and privilege leave. Employees are allowed to carry forward some categories of paid leaves whereas other leaves not availed during the year simply lapse. Employers generally allow employees to carry forward their privilege leave only up to a certain limit, beyond which this leave also lapses. Again, some employers allow their employees to encash some of accumulated leaves either during the continuance of their employment or at the time of leaving their job either on resignation or at the time of reaching the age of superannuation. Can you change tax regime while filing Income Tax Return (ITR)? Tax treatment of encashment of leave at the time of retirement or on resignation A) Rules applicable to government employee Income tax laws allow certain exemptions in respect of the money received for encashment of leave at the time of leaving the job. The rules are different for government employees whether Central government or state government and other employees. For government employees, the money received for encashment of leave is fully exempt without there being any upper monetary limit or as to the number of days leave encashed. Also Read: Please note that the exemption is available only to the government employees and not to those who are working in companies owned by governments. So, the exemption is available to employees working in revenue departments, governme...

In line with the budget 2023 proposal, the finance ministry has notified the increased ceiling for encashment of earned leave that is exempt from income tax via a notification dated May 24, 2023. This will come into effect from April 1, 2023 “In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs. 25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise.This notification shall be deemed to have come into force with effect from the 1st day of April, 202,” stated the finance ministry circular 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. 4. Leave encashment actually received at the time of retirement.” Don’t miss out on ET Prime stories! Get your daily dose of business updates on WhatsApp.

Of these, casual and sick leaves not availed during a year usually lapse while earned leaves are carried forward. Depending upon their policy, employers allow carrying earned leave forward only to a certain limit. Beyond this limit, earned leaves can also lapse. However, some employers also offer the facility of encashing the earned leaves during the continuation of service or leaving the job due to termination of service, resignation, or retirement. The money earned through encashment is also liable to be taxed. Here's everything you need to know about the income tax implication of leave encashment. Tax obligation in case of encashment of leaves in continuation of employment: Exemption on encashment of leaves is only available when an employee leaves the company. Hence, when an employee encashes their leaves to continue their services, the money earned is treated as a salary. The amount is liable to be fully taxable in your hands, and the employer will deduct the applicable tax. Tax obligation in case of encashment of leaves on resignation or retirement: The amount earned by encashing leaves by a government employee is fully exempt without any upper monetary limit or the number of days leaves are encashed. The exemption is only available to government employees and not employees working in government companies or undertakings. So, the exemption rules may not apply to employees in government banks, insurance companies, and power generation companies. Employees working in t...

As per labour laws, every employed person is entitled to a minimum number of paid leaves annually. Nonetheless, an employee doesn’t need to utilise all of their allotted leave days within a single year. Several employers offer the option for employees to carry forward any unused paid leave to the subsequent year. Inevitably, this results in the employee having a remaining balance of unused leave when retiring or resigning from the company. As a result, the employer is obligated to provide compensation for the unused paid leave, which is commonly referred to as leave encashment. Taxation of Leave Encashment: Indeed, according to the law, leave encashment is subject to taxation. When an employee receives leave encashment during their employment, the amount is considered part of their “income from salary". However, under Section 89 of the Income Tax Act, one can avail of certain tax benefits. To claim tax relief for leave encashment, it is necessary to complete Form 10E. Tax obligations when leaves are encashed while continuing employment: The exemption for leave encashment is applicable only upon an employee’s resignation from the company. Therefore, if an employee decides to exchange their accumulated leaves for cash while remaining employed, the received amount is considered as part of their salary. The entire sum earned is subject to taxation, and the employer will deduct the applicable taxes accordingly. Tax obligation upon the encashment of leaves during resignation or ...