If you are about to retire and not in Government service, be warned. Your leave encashment beyond Rs 3 lakh will be subject to tax.
The income-tax rule exempts only State and Central Government employees from the purview of tax on encashment of leave salary on retirement under Section 10 (10AA)(ii) .
Stating that this rule is discriminatory and unjust, individuals close to retirement felt that the tax exemption should be made applicable to others, including employees working in public sector undertakings and quasi-Government organisations, or the ceiling should be enhanced from the current limit of Rs 3 lakh.
“If income is income in the hands of every salaried person, why this discrimination in the taxation rule when it comes to leave encashment on retirement?” they asked.
It may be noted that under the existing rule, the encashment of accumulated leave at the time of retirement in the case of State and Central Government employees is fully exempt from tax under Section 10 (10AA)(i) of the IT Act.
Since full leave encashment (10 months) is exempt, if the Government employee gets say Rs 15 lakhs (as leave encashment), the entire amount is exempt from tax, whereas in respect of others, the tax exemption on encashment of accumulated leave is limited to Rs 3 lakh and the amount received beyond this limit is subject to tax (Sec 10 (10AA) (ii)).
The Secretary of the Coimbatore Consumer Cause, K Kathirmathiyon, has in a communication to the Finance Ministry appealed to it to look into this issue and provide reasonable relief to retiring employees.
He further said even this relief of Rs 3 lakh for non-Government employees was fixed 18 years ago in 1998 and should, therefore, be reviewed.
“During the 90s, the limit was reviewed and increased gradually from Rs 1,30,320 on April 1, 1995, to Rs 1,35,360 in July, the same year, and further to Rs 2,40,000 two years later in 1997. It was enhanced to Rs 3 lakh on April 2, 1998, and thereafter, left untouched,” the CCC Secretary said.