Exemption from amount received as leave salary is available under Section 10(10AA) of Income Tax Act, 1961. For the purpose of availing exemption under section 10(10AA), the employees are divided into 2 types of categories: 1. Govt Employees (Central Govt and State Govt employees only): Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by a Govt employee, is fully exempt from tax. No tax would be levied on any amount received as leave encashment by govt employees on retirement. 2. Other Employees: Leave encashment of accumulated leave at the time of retirement whether on superannuation or otherwise received by any other employee (except those covered above) is exempt from tax to a certain limit. In such a case, the least of the following shall be exempted: 1. Leave encashment actually received 2. 10 months “average salary” 3. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of completed service. 4. Amount specified by the Govt i.e. Rs. 3,00,000. Relevant Points regarding Tax on Leave Encashment 1. Salary for the purpose of above computation means “Basic + Dearness Allowance”. It also includes commission based on fixed percentage of turnover achieved by the employee. However, any other allowance received is not to be included in the computation of Salary. 2. Average Salary is to be computed on the basis of the average salary drawn by the employee during the period of 10 months immediately preceding his retirement. 3. If the employee has received leave encashment in any one or more earlier previous year(s) also and had availed of the exemption in

Taxation of Leave Salary

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Tax on Leave

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Exemption from amount received as leave salary is available under Section 10(10AA) of Income Tax Act, 1961.

For the purpose of availing exemption under section 10(10AA), the employees are divided into 2 types of categories:

1. Govt Employees (Central Govt and State Govt employees only): Leave encashment of accumulated leave at the time of retirement, whether on superannuation or otherwise, received by a Govt employee, is fully exempt from tax. No tax would be levied on any amount received as leave encashment by govt employees on retirement. 2. Other Employees: Leave encashment of accumulated leave at the time of retirement whether on superannuation or otherwise received by any other employee (except those covered above) is exempt from tax to a certain limit. In such a case, the least of the following shall be exempted: 1. Leave encashment actually received 2. 10 months average salary 3. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days leave for every year of completed service. 4. Amount specified by the Govt i.e. Rs. 3,00,000.Relevant Points regarding Tax on Leave Encashment

1. Salary for the purpose of above computation means Basic + Dearness Allowance. It also includes commission based on fixed percentage of turnover achieved by the employee. However, any other allowance received is not to be included in the computation of Salary.

2. Average Salary is to be computed on the basis of the average salary drawn by the employee during the period of 10 months immediately preceding his retirement.

3. If the employee has received leave encashment in any one or more earlier previous year(s) also and had availed of the exemption in respect of such amount, the limit of Rs. 3,00,000 specified above shall be reduced by the amount of exemption availed earlier.

4. Leave encashment received by the family members after the death of an employee is not chargeable to tax in the hands of the family member.

5. The retirement of employee may be of various kinds. It may be on superannuation or voluntary such as resignation.