Taxation and Exemptions for Leave Encashment
You have access to several forms of leave as a salaried employee, including annual and earned leave, sick leave, and casual leave. Now of retirement or resignation, many employers allow employees to cash in their accrued vacation time.
The sum obtained via this facility is not excluded from the Leave Encashment Tax and is subject to it. Here is a breakdown of the taxation of leave encashment.
Leave Encashment – Definition
The term “leave encashment” refers to the ability of a single employee of a company to cash in any unused paid time off. Leave encashments are finished within a certain time frame.
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Your leave encashment is tax-free if you work for the government, but if not, you can be subject to additional taxes. For such an encashment to take place, the amount is computed depending on several factors, including basic pay and the dearness allowance.
Taxes on Leave Encashment
Leave encashment while on duty
Accumulated vacation time may be used either while still employed or after retirement or resignation. Every leave taken while employed is wholly taxable and counted as “income from Salary.” On the other hand, section 89 relief might be requested (refer this circular).
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At the moment of retirement or resignation, encashed leave
Depending on the employee’s classification, leave encashment received at the time of retirement or resignation is either totally or partially exempt. The following is extended on this:
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- The encashment of leave by a Central or State Government employee at the moment of retirement or resignation is entirely exempt.
- Employees’ legal heirs who get leave encashment are entirely exempt.
- Based on the calculation in Section 10(10AA)(ii), leave encashment for non-government employees is exempt, and any remaining amount is taxable as “income from salary.”
Exemptions
- average monthly earnings for the last ten months.
- The government only permits up to 3 lakhs.
- The cash equivalent of paid leaves for every year of employment (up to 30 days).
- The money collected for leave encashment is charged if it is obtained by a worker while they are still on the job.
- Taxes are not applied to the amount of leave encashment received at retirement.
- The value of a leave encashment is subject to income tax regulations and is taxed at the employee’s tax slab rate since it is considered payroll income.
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Based on an individual’s salary and the employer’s leave encashment policy, tax planning can be done by determining whether it is preferable to encash leave each year or receive a lump amount at the time of retirement or resignation.
