The Buyt Desk
On 1 February 2023, Union Finance Minister Nirmala Sitharaman during her annual Budget speech for the financial year 2023-24 announced the new leave encashment exemptions. The government has made a big jump in the limit of leave encashment from Rs 3 lakh to Rs 25 lakh as a positive move for taxpayers. Leave encashment is when employees from the organized sector are offered money in exchange for leave not availed.
The Finance Minister said “Rs 3 lakh limit for tax exemption on leave encashment on non-government salaried employees retirement was last fixed in 2002. At that time, Rs 30,000 was the highest basic pay in the government monthly. Considering the rise in government salaries, I’m proposing to raise this limit to Rs 25 lakh.”
What is the meaning of leave encashment?
A salaried individual is entitled to the least number of paid leave annually. However, an individual employee not necessarily uses all his/her entitled leaves in a year. They have the option to carry forward those unused paid leaves. As a result, the employee is left with an unused leave balance at retirement or resignation time from the company. This makes the employer compensate the employees’ remaining paid leaves. And, this concept is considered as leave encashment.
Is leave encashment considered taxable?
According to the law, the leave encashment is taxable. When an employee gets leave encashment during a job, the amount would be an aspect of ‘income from salary’. However, they can claim some tax relief under I-T Act Section 89 for leave encashment. To claim tax benefits, they have to fill a form 10E.
Encashment of received leave of up to 10 months of average salary, at retirement time in case of an employee excluding central government or state government employee, is exempted under Income-tax Act’s sub-clause (ii) of clause (10AA) of section 10 to the level notified. At present, up to Rs 3 lakh can be exempted but now with the new issuance of notification, the new increase limit of Rs 25 lakh will be applicable.
Just because the Centre has increased tax exemption on leave encashment on non-government salaried employees’ retirement to Rs 25 lakh, it would benefit almost lakhs of employees to save their capital.
