What is Leave Encashment?
Leave Encashment is the payment received by an employee for their accumulated earned/privilege leave that was not availed during service. This payment is typically made at the time of retirement, resignation, or on death of the employee.
Our Leave Encashment Calculator helps you compute the gross encashment amount and the tax-exempt portion under Section 10(10AA) of the Income Tax Act based on your service tenure, salary, and accumulated leaves.
Leave Encashment Tax Exemption Rules
- Government Employees: Entire leave encashment is fully exempt from tax
- Private Sector (at Retirement): Exemption up to Rs 25 lakh (increased from Rs 3 lakh in 2023)
- During Employment: Leave encashment received while in service is fully taxable
- Legal Heirs: Leave encashment received by legal heirs on employee's death is also exempt
Calculation of Tax Exemption (Private Sector)
The exempt amount is the least of the following:
- Actual leave encashment received
- Rs 25,00,000 (statutory limit)
- 10 months' average salary
- Cash equivalent of leave balance (max 30 days per year of service)
Leave Encashment Formula
Encashment Amount = (Basic + DA) / 30 x Number of Leave Days
- Basic: Your monthly basic salary
- DA: Dearness Allowance (if applicable)
- Leave Days: Accumulated leaves being encashed
Example Calculation
Scenario: Basic Rs 50,000, DA Rs 5,000, 240 leaves accumulated, 20 years service
- Gross Encashment: Rs 55,000/30 x 240 = Rs 4,40,000
- Max Leaves Considered: 30 x 20 = 600 days (actual 240)
- 10 Months' Salary: Rs 5,50,000
- Exempt Amount: Least of above = Rs 4,40,000
- Taxable Amount: Rs 0 (fully exempt)
Important Points
- Only EL/PL Counts: Casual leave and sick leave cannot be encashed
- Company Policy: Maximum leaves that can be accumulated varies by employer
- Resignation vs Retirement: Tax exemption only applies at retirement/superannuation, not resignation
- Multiple Employers: Rs 25 lakh limit is cumulative across all employers in lifetime
Frequently Asked Questions
Is leave encashment taxable on resignation?
Yes, if you resign (not retire), the entire leave encashment amount is fully taxable as salary income. The exemption under Section 10(10AA) only applies at the time of retirement, superannuation, or death.
What is the maximum tax exemption for leave encashment?
For private sector employees at retirement, the maximum exemption is Rs 25 lakh (increased from Rs 3 lakh effective April 2023). For government employees, the entire amount is exempt without any upper limit.
How is average salary calculated for leave encashment exemption?
Average salary is calculated as the average of Basic + DA for the 10 months immediately preceding the month of retirement. HRA, allowances, and other components are not included.
Can I claim leave encashment exemption from multiple employers?
Yes, but the total exemption across all employers in your lifetime cannot exceed Rs 25 lakh. If you've already claimed Rs 10 lakh from a previous employer, only Rs 15 lakh can be claimed from subsequent employers.
What happens to leave encashment if employee dies?
Leave encashment paid to legal heirs on the death of an employee is fully exempt from tax under Section 10(10AA). The Rs 25 lakh limit does not apply in case of death.
Is leave encashment received during service taxable?
Yes, any leave encashment received while still employed (not at retirement) is fully taxable as salary income. This includes leave surrendered during service for cash benefit.