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Leave encashment and LTA benefits: Encash your leaves only on retirement – here’s why

While leave encashment received during tenure of service is fully taxable, LTA exemption is available on the least of actual amount received or actual expenses

Leave encashment and LTA benefits: Encash your leaves only on retirement – here’s why
While leave encashment is given against unutilised leaves during employment or on retirement, LTA is provided to cover for the expenses incurred by the employee for personal outstation travel.

Salaried employees are usually entitled to two types of leave-related benefits — Leave Encashment and Leave Travel Allowance (LTA). While leave encashment is given against unutilised leaves during employment or on retirement, LTA is provided to cover for the expenses incurred by the employee for personal outstation travel.

Let’s take a look at the taxation of both of these employee benefits separately.

Leave encashment

Leave encashment received at the time of retirement/resignation is fully exempt for government employees. However, if received during the tenure of service it is fully taxable for both government and private sector employees. In case of leave encashment received by private sector employees at the time of retirement/ superannuation, exemption is allowed to the extent of the least of the following:

i. Salary per day multiplied by unutilised leave (considering maximum 30 days leave per year) for every year of completed service.
ii. Average salary for the last 10 months
iii. Actual amount received
iv. Rs 3 lakh

“Average salary means the average of last 10 months salary wherein salary would constitute basic salary, dearness allowance and commission based on a fixed percentage of turnover secured by an employee,” says Suresh Surana, founder, RSM India. “Leave encashment received from two or more employers during the financial year would be subject to the limit of Rs 3 lakh.”

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Further, the leave credit would be computed as leave allowed minus leave availed, wherein the leave allowed shall not exceed 30 days for each completed year of service.

“Leave encashment limit of Rs 3 lakh is aggregate exemption during the lifetime of an employee. If the employer credits more than 30 days per year, the exemption shall be restricted to 30 days per year. Leave encashment received by the employee’s legal heirs on his demise is fully exempt,” says Nitesh Buddhadev, chartered accountant and founder of Nimit Consultancy.

LTA taxation

LTA exemption is available for two journeys in a block of four calendar years. The current block is the calendar year 2022-2025. It is allowed on the least of the actual amount received or actual expenses. “Actual cost of travel is limited strictly to air, rail or bus fare incurred by the employee and that too within India,” says Buddhadev.

The exemption is available only for one trip in one calendar year. “If an employee is not availing LTA exemption, one journey can be carried over to the next block. However the same should be availed in the very first calendar year of the next block,” says Surana.

LTA exemption in case of a multi-destination journey is available for the travel cost from the place of origin to the farthest place of the journey via the shortest route. For example, LTA exemption for a Mumbai-Nasik-Ahmedabad trip would be allowed for Mumbai to Ahmedabad and return only.

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