Taxability of Leave encashment

20 Oct 2022

EARNED LEAVE ENCASHMENT

(Case Study Included)

Many working-class salaried individuals often doubt whether they have received full amount of leave encashment at time of retirement? Whether it is fully exempted? Can we convert casual leave to leave encashment? And many more questions which come to our mind will be answered here & most importantly without any long examples/tables or complicated math. Just simple things which one should remember while filing ITR.  

Also, you will get to know why everyone say – “सरकारी नौकरी की बात ही अलग है “


Let’s understand this topic with help of Questionnaire:

Q1. What is “Earned Leave Encashment”?

Ans. “Leave salary means the salary for the period of leave not availed by the employee. The encashment of accumulated leave can be at the time of retirement or during the continuation of service”


Q2. Types of Leave Encashment according to Taxation 

Ans.

Encashment received by Legal Heirs is fully exempted 

Is fully or partially Exempted* 

Is fully taxable* & forms part of your salary.

*Relief u/s 89 can be claimed


Q3. Who all are Fully & Partially Exempted?

Ans.

Q4. Any Simple Example showing how it appears on Form 16?

Ans. Yes, sure 


*Full Exemption of Rs. 7,55,640/- is given because Individual is a Government employee (सरकारी नौकरी) .

 If he has been under Private employment then where “755640” is written on its right-hand side “300000” would also have been written. As told earlier in the chart only up to Rs. 3,00,000 exemption is allowed to private salaried individuals.


Q4. Are there any rules for taking out exact or how much exemption a Non- Government Employee will get? 

Ans.  I know at the start only I told you there will be no formulas or long examples BUT you can understand this very easily. You just need to follow or choose the right amount of exemption according to these fixed standards.

Also remember “The Least amount / Lowest Amount” will be considered for Leave Encashment.

Before heading into these details, let me explain you with small example – easy to understand – 

What if I have received Rs. 3,50,000/- as earned leave encashment, can I claim full exemption?

No, remember the maximum limit for Private Salaried Individual is up to RS. 3,00,000/- only. 

Now, we can see the rules: Remember Least/Lower of these amounts : 



Q5. Are Casual Leave or Sick Leave part of Earned Leave Encashment?

Ans. No, Sick Leave & Casual Leave are not part of Leave Encashment.


Case Study: 

A BSNL Employee took VRS, his Form 16 also shows Leave Encashment amounting RS. 5,38,010 /- . After filing his ITR return, CPC only gave exemption up to RS. 3,00,000/- .

But he went for appeal against the order and appeal was allowed. 

Why?

CPC didn’t know about a circular that was circulated by BSNL on 04/05/2012 in which BSNL quoted that 

The full amount received by a retiring absorbed employees the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement', under sub-clause (i) of Section 10(10AA), Income Tax Act, 1961, calculated as per the accepted norm adopted for calculating the Amount due for the Government service period, will be eligible for full exemption, on the date of absorption, in BSNL from DOT.”




Siddharth Sachan