Respected Sir,
All salaried have different type of leaves namely: Sick Leave, Casual Leave, Earned/Privilege leave, etc. If employees take lesser leaves than they are eligible for, most employers encash the left over leaves either annually or at the time of leaving the company. Of all types of leaves only earned or privilege leave is encashable.
Tax Exemption Under Section 10(10AA)
In such a case, the following points are considered in order to receive the exemption under section 10(10AA).
- The leave encashment amount actually received is taken into account
- The average salary of 10 months. The salary includes basic salary and dearness allowances. Also, the commission received is considered. The salary of 10 months actually considered is on the basis of salary received during the 10 months preceding their retirement or resignation.
- Even if the employee has accumulated number of leaves in a year, the organization will consider only a maximum of 30 days of leave a year for the encashment process. According to it, the total number of paid leaves will be calculated altogether during the retirement or resignation and then encashment will be processed further. Suppose a person has not utilized all the paid leaves and it accounts for 45 days still the organization will only consider 30 days of paid leave for encashment at the time of resignation or retirement.
- In the case of leave encashment during the employment period the amount received will totally be taxable in all forms. But according to Section 89, Income Tax Act, the employee can claim for tax relief from their leave encashment amount.
- For employees who have retired after 1998, their leave encashment amount is subjected to a maximum limit of Rs. 3, 00,000 to be received which is specified by the government. When the actual amount to be received will be more than Rs. 3, 00,000, then 3, 00,000 will be received as the encashment amount and the remaining amount will be received in the salary account which will be taxable. This case applies only for non-government employees.
- The legal heirs of deceased employees at the time of leave encashment can receive the amount without any form of tax deduction from the amount.
- In case of resignation or termination, both government and non-government employees are held to pay the tax on the amount received from paid leave encashment because the amount at the time is considered as income from salary by the income tax department. The rate of tax to be paid is applied same as during income tax salary.
hope you find this helpful
regards
