LEAVE ENCASHMENT AND TAX TREATMENT

 

LEAVE ENCASHMENT (Sec 10[10AA]

·         Leave encashment is the process of receiving money for unused paid leave accumulated by an employee.

·         Employees are entitled to a minimum number of paid leaves annually, and many employers allow these unutilised leaves to be carried forward.

·         Upon retirement or resignation, employers are typically obligated to compensate employees for their accumulated, unutilized paid leave, which is known as leave encashment.

TAX TREATEMENT

I. Leave Encashment Received During the Period of Service:

It is fully taxable.

II. Leave Encashment Received on Retirement (Superannuation or Otherwise):

A. By a Government Employee:

               Fully exempt under Section 10(10AA)(i) of the Income Tax Act.

B. By Any Other Employee (Non-Government)

    The least of the following four amounts is exempt under Section 10(10AA)(ii):

        i.           i_ Notified limit                                                                                    Rs,25,00,000

ii) 10 month’s average salary10x5,000=                                             Rs. XXXX

iii) Cash equivalent of leave due at the time of retirement:            =  Rs. XXXX

iv) Actual Amount received                                                                 Rs. XXXX

Problem:1

               Mr. Kathick, retires on 1st July 2024 after 18 years of service and receives Rs.75, 000 as amount of leave encashment for 15 months. His employer allows 45 days leave for every one year of service. During service he has already encashed leave for 12 months. Calculate the taxable amount of leave encashment if his salary during 1-7-2023 to 1-7-2024 was Rs.5, 000 p.m.

 

SOLUTION

Salary Received

75,000

Less: Exemption ( Lease of the following 4 )

I Notified limit                                                                                    Rs,25,00,000

ii) 10 month’s average salary10x5,000=                                             Rs.50,000

iii) Cash equivalent of leave due at the time of retirement:6x5,000=  Rs.30,000

iv) Actual Amount received                                                                 Rs.75,000

 

 

 

 

30,000

Taxable Leave Encashment

45,000

Note :Calculation of Leave Due

Leave for every years of service 18x1                                    =18 months

Less: Leave already availed                                                    =15 months

Leave due to his credit                                                           = 6 months

PROBLEM: (in Days )

Mr Vimal is retiring after 15 years of service. Mr A was entitled to 35 days of paid leave per annum from his employer, i.e., overall 525 days of leave during his entire service (35*15).

Out of the same, Mr A has already utilised 200 days of paid leave and is left with 325 days of unutilised leave. Mr A was drawing basic salary + DA of Rs 33,000 per month at the time of retirement and received Rs 3,57,500 as leave encashment calculated based on 325 days * Rs. 1,100 (salary per day = Rs.33,000/30 days).

SOLUTION

Calculation of Leave due to his Credit

Total Eligible Leave                (15 yearsx30 days)      : 450 days

Leave already availed                                                 :200 days

Leave to his credit                                                      : 250 days

Calcution of taxable leave encashment

               Salary Received

3,57,500

Less: Exemption ( Lease of the following 4 )

i) Notified limit                                                                                    Rs,25,00,000

ii) 10 month’s average salary10x33,000=                                           Rs.3,30,000

iii) Cash equivalent of leave due at the time of retirement:

250x1,100=                                                                                         Rs.2,75,000

iv) Actual Amount received                                                               Rs. 3,57,500

 

 

 

 

2,75,000

Taxable Leave Encashment

82,500

 


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