Finance Ministry has notified the enhanced limit of earned leave encashment for exemption from Income Tax. This aims to implement the budget proposal.

In the budget for Fiscal Year 2023-24, Finance Minister Nirmala Sitharaman had announced that the limit of ₹3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was ₹30,000 per month. “In line with the increase in government salaries, I am proposing to increase this limit to “₹25 lakh,” she said.

Now, a notification issued by the Finance Ministry, dated May 24, explains that the new limit “shall be deemed to have come into force with effect from the first day of April, 2023.” It means an individual superannuating on or after April 1, 2023, will get the benefit of a new limit. The Ministry also certified that no person is being adversely affected by giving retrospective effect to this notification.

A senior Finance Ministry official said that the new limit will be applicable in both the old and new Income Tax regimes.

Later in a statement, the Income Tax Department said that the aggregate amount exempt willnot exceed the limit of Rs. 25 lakh where any such payments are received by a non-government employee from more than one employer in the same previous year. Further, the amount exempt will not exceed the limit of Rs. 25 lakh as reduced by the tax exemption already allowed in the total income of the employee under section 10(10AA)(ii) of any previous year or years.

Every salaried person, as per labour law, is entitled to a minimum number of paid leave every year. However, it is not necessary that an individual employee utilises all the leave he is entitled to in a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves.

This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company, as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is known as leave encashment.

Leave encashment received by employees is taxable based on when it is received. If an employee gets leave encashment while on his job, that amount becomes fully taxable and forms part of ‘Income from Salary.’ However, one can claim some tax benefits under Section 89 of the Income Tax Act. He needs to fill up form 10E to claim the tax relief for leave encashment. One can fill up and submit this form online on the income tax portal. 

Pointers
  • Post retirement Income Tax exemption
  • Full amount of leave encashment for government (Central as well State) employees
  • Full amount of leave encashment amount received by the legal heir of a deceased employee is fully tax-exempt in the hands of the legal heirs.
  • Leave encashment amounting ₹25 lakh wiith effect from April 1, 2023 and ₹3 lakh up to March 31, 2023. Balance amount taxable
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