Leave salary is received at the time of retirement/superannuation is exempt as follows :
Government Employees:
As per section 10(10AA)(i), any amount received as cash equivalent of leave salary in respect of the period of earned leave at his credit at the time of retirement/superannuation is exempt from tax.
Non-Government Employee:
As per section 10(10AA)(ii), leave salary is exempt to the lowest of :
Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired); (In Simple Words - Salary per day *unutilised leave days (maximum 30 days leave per year for every year of completed service) or
10 months "average salary"; or
Rs 25,00,000
Leave encashment actually received at the time of retirement.
Points to Note:
"Average salary" is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement/superannuation.
"Salary" means basic salary, dearness allowance and commission based on fixed percentage of turnover
“Leave salary received during employment” is chargeable to tax in the hands of Govt./Non-Govt. Employee. Thus leave encashment received on retirement or superannuation or leaving an job is only subject to exemption and received during from employer when you are in continued service is taxable.
Limit of Rs 25 Lkahs is cumulative of lifetime. Thus if say exemption of Rs 4 Lakh is if availed in any one year than leave encashment exemption limit will reduce to Rs 21 Lakh for exemption purpose when you receive leave encashmnet from any subsequent employers.
Example:
Mr Z is retiring after 18 years Mr Z was entitled to 38 days of paid leave per annum from his employer, i.e., overall 684 days of leave (38*18)
Mr A has used 300 days of paid leave and is left with 384 days of unutilised leave. Mr A was drawing total salary of Rs 80,000 with includes basic salary + DA of Rs 40,000 per month at the time of retirement.
Mr. A received Rs 1024000 as leave encashment (80000/30*384)
Out of Rs 10,24,000 following will be lower of below exempt under Income Tax :
Balance of Credit Available (Maximum 30 Days for each year of service) = [40000/30*(30*18-300)] = Rs. 3,20,000
Leave Enchasment Received = Rs 10.24 Lakhs
10 Months Average Salary = Rs 40,000*10 = Rs 2,40,000
Rs 25 Lakhs
So Maximum Exemption will be Rs. 2,40,000
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