Section 10(10AA)(ii): Exemption for Encashment of leave salary at the time of retirement under the Income Tax Act 1961

By | June 5, 2015

Exemption for Encashment of leave salary at the time of retirement by other employees (including employees of Local Authorities and Public sector Undertakings) under Income Tax Act 1961: Section 10(10AA)(ii)

Every employee in an organization is entitled to certain no. of leaves in a year. If the employee does not utilize those leaves he can carry forward the unutilized leave and get it encashed later. This leave encashed is leave salary.

Leave encashment if taken during continuity of employment, then it is chargeable to tax both for Govt. and Non-govt. employees

Leave encashment at the time of retirement/ leaving job is exempt for Govt. employees.

Leave encashment at the time of retirement/ leaving job is exempt or partially exempt u/s 10(10AA)(ii).

Reference:

As Per Section 10(10AA)(ii), Of the Income Tax Act, 1961-

10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—

any payment of the nature referred to in sub-clause (i) received by an employee, other  than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement [whether] on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement [whether] on superannuation or otherwise, [subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government] :

Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause [shall not exceed the limit so specified] :

Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause [shall not exceed the limit so specified], as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.

[Explanation.—

For the purposes of sub-clause (ii),—

the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;]

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