Section 56(2)(vii) is among many exceptions provides under clause (d) that if an individual or HUF receives any sum of money without consideration (read as gift ) in contemplation of death , the receipt will not be taxable. The issue is what is the meaning of phrase "in contemplation of death " which is not explained any where in the Income Tax Act.
Leave salary is part of salary as per section 17(1) of the I T Act. As such it is taxable in hand of employee during the employment period. However, if the cash equivalent of leave salary is paid to legal heir on his /her death, the amount is not taxable in hand