Is Leave Encashment Taxable ?

July 20, 2008 by taxworry · Leave a Comment

I have changed my job recently and shifted from Chennai to Hyderabad. In have joined new company in the month of Feb 2008.My previous company has paid for the balance earned leave as leave encashement (Rs. 153,000) and added in to my total salary and deducted the tax. Is it taxable or exempted? If exempted shall I claim the same during this tax returns filing.Please advise and inform me what has to be done in this case.V V G K Gokhale , Hyderabad
I presume that you were not employed by either Central Govt. or State Govt. As far as rules of taxation of leave encashment is concerned , it is different for different class of employees and also depends on situation or circumstances under which it is received. Maximum exemption of Rs 3,00,000 have been provided u/s 10(10AA) of the I T Act for any employee receiving the leave encashment at the time of retirement.

For readers , complete scheme of exemption in case of leave encashment is given covering different situation. Following chart shows scheme of exemption briefly

What is the meaning of Salary & Average Salary?

Salary means Basic, D.A & fixed % of turnover as commission . Average salary means average of last 10 months salary drawn immediately preceding the month of superannuation or retirement.

Is resignation covered for exemption u/s 10(10AA)?

Section 10(10AA) uses the words “retirement on superannuation or otherwise”. The courts have ruled that the word retirement used in section 10(10AA) is not used in restricted sense to cover only retirement at the time of superannuation. Presence of words “otherwise” signifies retirement by any other mode like resignation or voluntary retirement etc. Following case laws should be referred in this regard:

CIT v. Ram Rattan Lal Verma [2005] 145 Taxman 256 (All.).
CIT v. Vijai Pal Singh [2005] 144 Taxman 504/
CIT v. Ashok Kumar Dixit [2005] 273 ITR 126 (All.).
CIT v. D.P. Malhotra [1997] 142 CTR (Bom.) 325.
CIT vs R.J. Sahaney [1986] 159 ITR 160 (Madras)

What If you receive Leave Encashment from more than one employer?

The proviso to section 10(10AA) provides as under

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.

The aforesaid provision, in simple terms states that total exemption through out your career is only upto maximum Rs 3,00,000. So , if you have already claimed certain amount as exempt , that much amount will be reduced from the income compute for exemption purpose u/s 10(10AA) of the I T Act.
Is leave encashment received by legal heir taxable?

No , as per circular letter no F.35/1/65-IT(B) dated November 5, 1965 of CBDT in this regard which exempts receipts of leave encashment in hand of legal heir of employees. Similarly , widow of govt. official receiving leave encashment is not taxable in her hand vide circular 308 dated3/7/1987 .

Answer specific to your question

Compute your exemption limit as per above and if the employer has already deducted the tax on it, claim it in your return for Asst Yr 2008-09 (FY 2007-08 ) and claim any refund which arises because of it.

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