Can You Claim Exemption on Leave Salary Received in case of Resignation from Job ?

The receipt of leave salary is taxed as salary. However, section 10(10AA) provides for exemption computed as per Rule if the leave salary is received on superannuation or retirement or “otherwise”. Section 10(10AA) is as under

10(10AA)

(i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ;

(ii) 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

The issue whether exemption u/s 10(10AA) is covered for resignation from employment ,under the words “otherwise” , came up before Court and it was held that the word “otherwise” include resignation from service as well. 

Circular of The Central Board of Direct Taxes

The relevant portion of the Circular No. 394 dated September 14, 1984 [1984] 150 ITR (St.) 3). reads as follows (page 5) :

“6.2 It has come to notice that attempts have been made by taxpayers to claim exemption under the aforesaid provision in respect of payments received by them for not utilising leave even while in service. With a view to avoiding litigation on this point, the Amending Act has made two amendments to put the underlying intention beyond doubt.

6.3 Under one of the amendments, a new sub-clause (va) has been inserted in clause (1) of section 17 of the Income-tax Act to provide that any payment received by an employee in respect of any period of leave not availed of by him shall be regarded as ’salary’. The other amendment has been made in section 10(10AA) of the Act to clarify that the exemption under the aforesaid provision shall be allowed only where the payment is received by the employee on his retirement, whether on superannuation or otherwise. The combined effect of the two aforesaid amendments will be that payments received by an employee in respect of any period of leave not availed of by him will be exempt from income-tax only in cases where such payments are received on retirement and subject to the fulfilment of the other conditions laid down in section 10(10AA) of the Income-tax Act.”

Madras High Court  in Commissioner Of Income Tax.vs R. J. Shahney. 159 ITR 160

Under the provisions of section 10(10AA), the payment received by an employee as cash equivalent of leave salary in respect of the period of earned leave to his credit at the time of his retirement whether on superannuation or otherwise, shall not be included in computing the total income. In this case, the assessee resigned and retired from the employment. Learned counsel for the Revenue sought to contend that since the words " Whether on superannuation or otherwise " qualifies retirement, unless it is a case of retirement from service on attaining a particular age, or on some other reason, a case of resignation will not take in. We are unable to agree. The retirement may be of various kinds. It may be on superannuation or it may be voluntary. If there is any voluntary retirement from service, we are satisfied that the provisions of section 10(10AA) would apply. Therefore, no question of law could be said to arise out the order of the Tribunal. The petition is accordingly dismissed with costs. “

This was followed by Bomaby High Court in CIT v.Malhotra (D P) 229 ITR 394

The retirement may be of various kinds. It may be on superannuation or it may be voluntary. If there is any voluntary retirement from service, we are satisfied that the provisions of section 10(10AA) would apply.