{"id":39735,"date":"2022-02-02T12:31:46","date_gmt":"2022-02-02T07:01:46","guid":{"rendered":"https:\/\/corpbiz.io\/learning\/?p=39735"},"modified":"2022-02-02T12:32:40","modified_gmt":"2022-02-02T07:02:40","slug":"leave-encashment-definition-and-tax-implications","status":"publish","type":"post","link":"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/","title":{"rendered":"Leave encashment: Definition and Tax implications"},"content":{"rendered":"\n<p class=\"has-drop-cap\">The notion of leave encashment is common\namong taxpayers from the salaried class. Every salaried individual as per labor\nlaw has the right to have a minimum number of paid leave every year. However,\nthe individual employee doesn&#8217;t necessarily need to utilize all the leave for a\nyear. Factually, most companies enable the employees an alternative of carrying\nforward such unused paid leaves.<\/p>\n\n\n\n<p>This would essentially leave the employee with accumulated unused leaves at the time of resignation or retirement from the organization as the case may be. The makes the employer compensate such leaves of the employees. This paradigm is broadly known as encashment of leave<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title ez-toc-toggle\" style=\"cursor:pointer\">Page Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 eztoc-toggle-hide-by-default' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/#Taxation_of_Leave_Encashment\" >Taxation of Leave Encashment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/#Leave_encashed_at_the_time_of_resignation_or_retirement\" >Leave encashed at the time of resignation or retirement<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/#Illustration_for_understanding_the_applicability_of_tax_exemption\" >Illustration for understanding the applicability of tax exemption<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/#Noteworthy_Facts_regarding_the_encashment_of_leave\" >Noteworthy Facts regarding the encashment of  leave<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/corpbiz.io\/learning\/leave-encashment-definition-and-tax-implications\/#Conclusion\" >Conclusion<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Taxation_of_Leave_Encashment\"><\/span>Taxation of Leave Encashment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Leave encashment availed during the\nemployment tenure<\/p>\n\n\n\n<p>Accumulated or unused leaves either be\nencashed during the employment tenure or during the retirement or resignation. Any\nleave encashed during employment tenure is subjected to applicable taxes and\nforms part of &#8216;income from Salary&#8217;.<\/p>\n\n\n\n<p>But, relaxation u\/s 89 can be claimed.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Leave_encashed_at_the_time_of_resignation_or_retirement\"><\/span>Leave encashed at the time of resignation or retirement<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Leave encashment received at the time of\nresignation or retirement is either partially or wholly exempt depending upon\nthe category that an employee belongs to. This has been explained further\nbelow: <\/p>\n\n\n\n<p>Leave encashment received by State or Central Gov. employee during the retirement or resignation is wholly exempt. It is available to the legal heirs of a deceased employee is wholly exempt. <\/p>\n\n\n\n<p>It is received by an employee of a non-governmental entity is exempt based on the estimation cited u\/s 10(10AA)(ii) &amp; balance amount if any is taxable as &#8216;income from salary<\/p>\n\n\n\n<p><strong><em>Formulas for calculating leave encashment exemption of non-gov. employees<\/em><\/strong><\/p>\n\n\n\n<table class=\"table table-bordered\"><tbody><tr><td>\n  Particulars\n  <\/td><td>\n  Amount\n  <\/td><\/tr><tr><td>\n  Leave encashment\n  received (A)\n  <\/td><td>\n  XXXXX\n  <\/td><\/tr><tr><td>\n  Less: Exemption u\/s\n  10(10AA) \u2013 &nbsp;&nbsp;(B)&nbsp;Least of the given:\n  <\/td><td>\n  XXXX\n  <\/td><\/tr><tr><td>\n  Amount as notified by\n  the Government** Rs 3,00,000 (C)\n  <\/td><td>\n  3,00,000\n  <\/td><\/tr><tr><td>\n  Actual leave\n  encashment amount (D)\n  <\/td><td>\n  XXXX\n  <\/td><\/tr><tr><td>\n  Average salary* of\n  last 10 months (E)\n  <\/td><td>\n  XXXX\n  <\/td><\/tr><tr><td>\n  Salary\/day * EL\n  (considering max 30 days leave\/year) for every year of completed service (F)\n  <\/td><td>\n  XXXX\n  <\/td><\/tr><tr><td>\n  Leave encashment\n  taxable \u2013 (A) \u2013 (B)\n  <\/td><td>\n  XXXX\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<p>Salary for this purpose entails basic\nsalary, dearness allowance (DA) &amp; commission based on fixed % of turnover\nearned by the employee. A specified amount of three lakh rupees is the total\namount permitted as exemption regardless of the frequency of leave encashment\nsecured by the employee by various employers.<\/p>\n\n\n\n<p>If an employee has already used Rs 2, 00,000 at the time of the first resignation, he\/she can only have access to the balance of Rs 1, 00,000 for the exemption estimation next time. Therefore, the overall employee is permitted exemption of Rs 3, 00,000 w.r.t leave encashed from all employers<sup><a href=\"https:\/\/www.epfindia.gov.in\/site_en\/For_Employers.php\"><strong>[1]<\/strong><\/a><\/sup>.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Illustration_for_understanding_the_applicability_of_tax_exemption\"><\/span>Illustration for understanding the applicability of tax exemption<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Mr. Karan is retiring after 16 years of\nservice. He was entitled to 35 days of paid leave per year from this company\ni.e. overall 560 days of leave during his employment tenure. <\/p>\n\n\n\n<p>Out of the same Mr. Karan has used 210\ndays of paid leave and consequently left with 350 days of unused leave. <\/p>\n\n\n\n<p>Mr. Karan was earning a basic salary +\ndearness allowance of Rs 35000\/month at the time of retirement &amp; earned Rs\n408,331 as leave encashment based on the following formula:<\/p>\n\n\n\n<p><strong>(Basic Salary + Dearness Allowance) \/ 30] x No of EL<\/strong> Rs 35000\/30days = Rs 1166.66 x 350 days <\/p>\n\n\n\n<table class=\"table table-bordered\"><tbody><tr><td>\n  <strong><em>Particulars<\/em><\/strong>\n  <\/td><td>\n  <strong><em>Amount (in Rs)<\/em><\/strong>\n  <\/td><\/tr><tr><td><\/td><td><\/td><\/tr><tr><td>\n  Leave encashment received\n  <\/td><td>\n  408,331 [350 days * Rs 1,100.66)\n  <\/td><\/tr><tr><td><\/td><td><\/td><\/tr><tr><td>\n  Less : exempt\n  <\/td><td>\n  2,75,000\n  <\/td><\/tr><tr><td><\/td><td><\/td><\/tr><tr><td>\n  Least of the given:\n  1. Amount as recommended by the\n  Government<br>\n  2. Actual leave encashment<br>\n  3. Average salary for 10 months \u2013 Rs 33,000 * 10 months<br>\n  4. Rs 1,100 * (30 days * 15 completed year of service minus 200 days of\n  utilised leave)\n  <\/td><td>\n  <br>\n  <br>\n  \n  3,00,000<br>\n  3,76,750<br>\n  <br>\n  3,30,000<br>\n  <br>\n  2,75,000\n  <\/td><\/tr><tr><td><\/td><td><\/td><\/tr><tr><td>\n  Leave encashment taxable as \u2018income\n  from salary\u2019\n  <\/td><td>\n  1,01,750\n  <\/td><\/tr><\/tbody><\/table>\n\n\n\n<p>Based on the leave encashment policy\n&amp; individual&#8217;s income, tax planning can be made by deciding whether it is\nprofitable to encash leave y-o-y or to secure lump-sum during retirement or\nresignation.<\/p>\n\n\n\n<p>The employee must take inflation cost\ninto account while deciding on the above.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Noteworthy_Facts_regarding_the_encashment_of_leave\"><\/span>Noteworthy Facts regarding the encashment of  leave  <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul><li>Encashment of  leave  in Central Govt Services shall be calculated in the following way: <\/li><\/ul>\n\n\n\n<p><strong>(Basic Salary + Dearness Allowance) \/ 30]\nx No of EL<\/strong> <strong>(Maximum\n300 days)<\/strong><\/p>\n\n\n\n<p>Note: Employee can take Half Pay Leave\ninto account if there is any shortfall in earned leaves.<\/p>\n\n\n\n<ul><li>The\nleave encashment of HPL for Central Government employees is calculated in the\ngiven manner: <\/li><\/ul>\n\n\n\n<p><strong>(Half Pay Leave Salary + Dearness\nAllowance) \/ 30] x No of HPL<\/strong><\/p>\n\n\n\n<ul><li>Leave salary secured during the retirement is non-taxable in any respect of amount. Leave salary secured during the employment tenure is taxable.<\/li><li>If you encash your leave during the employment tenure, then that amount is taxable without any exemption. <\/li><li>Gov. Employees are not entitled to pay any tax on income coming via leave encashment at the time of resignation. <\/li><li>The income secured by employees of the private sector as leave encashment after resignation or retirement is taxable as Income from Salary&#8217;. However, certain exemptions apply to such income. After allowing for such an exemption, the leftover sum shall be added to the regular income &amp; taxed under <a href=\"https:\/\/corpbiz.io\/income-tax-return-filing\"><strong>income tax slabs<\/strong><\/a>. <\/li><li>Private sector can avail exemption on income coming via leave encashment u\/s Section 10(10AA<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Simply put, the majority of companies permit their employees to carry forward their earned leaves for encashment at the time of retirement or resignation. Such encashment would attract certain taxes without any exemption.<\/p>\n\n\n\n<p class=\"text-left\"><b>Read our Article<\/b>:<mark style=\"background: #fffd03 !important;\"><a href=\"https:\/\/corpbiz.io\/learning\/concurrent-levy-of-gst-and-excise-duty-on-tobacco-items-is-fair-karnataka-hc\/\">Concurrent Levy of GST and Excise duty on Tobacco items is fair: Karnataka HC<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The notion of leave encashment is common among taxpayers from the salaried class. Every salaried individual as per labor law has the right to have a minimum number of paid leave every year. However, the individual employee doesn&#8217;t necessarily need to utilize all the leave for a year. Factually, most companies enable the employees an [&hellip;]<\/p>\n","protected":false},"author":22,"featured_media":39740,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[152],"tags":[2099],"acf":{"service_id":"50"},"authorName":"Pankaj Tyagi","authorImageUrl":"https:\/\/corpbiz.io\/learning\/wp-content\/uploads\/2022\/01\/MicrosoftTeams-image-42.jpg","authorDescription":"Pankaj has a diverse experience of writing research papers, blog, and articles during his college time. Earlier, he was working as a tax consultant in a financial firm, but his interest in writing drives him to pursue a career in the writing field.","postViews":6037,"readingTime":4,"_links":{"self":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/39735"}],"collection":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/users\/22"}],"replies":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/comments?post=39735"}],"version-history":[{"count":18,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/39735\/revisions"}],"predecessor-version":[{"id":39756,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/posts\/39735\/revisions\/39756"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media\/39740"}],"wp:attachment":[{"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/media?parent=39735"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/categories?post=39735"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/corpbiz.io\/learning\/wp-json\/wp\/v2\/tags?post=39735"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}