Leave encashment on resignation is not taxable

What is leave encashment? Accumulated leave standing to the credit of employees at the end of the year may be carried forward. It could also lapse based on the company’s policy.

Generally companies want employees to avail their leave balance. However, there are some companies which forfeit the leave also. There are companies that pay an amount computed on the basis of leave standing to the credit of the employee annually or allow accumulation with an upper limit and, thereafter, pay on retirement or resignation. Encashing the leave balance is known as leave encashment.

Taxability of leave encashment while in service: Leave encashment received while in employment is fully taxable in the hands of the employee. If an employer is making payment of the leave balance, the cash value received would be taxable in the respective financial year at the normal tax rates.

Taxability of leave encashment after retirement: The Income-tax Act, 1961 (IT Act) provides an exemption if the money is received on retirement for non-government employees. As per Section 10(10AA) of the IT Act, leave encashment is exempt to the extent of the lower of the following: Amount actually received from the employer as leave encashment; or cash equivalent

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