My father is about to retire soon and will be receiving leave encashment from his employer. I am a bit confused about whether this amount is fully taxable or if there is any exemption available. Can you please guide me on the taxability of leave encashment on retirement in India?
On retirement, the tax treatment of leave encashment depends on whether you worked in the government sector or private sector.
• For government employees: Leave encashment received at the time of retirement is fully exempt from tax.
• For non-government (private sector) employees: Leave encashment is exempt up to a certain limit under Section 10(10AA) of the Income Tax Act. The exemption is the least of the following:
1. Actual leave encashment received.
2. 10 months’ average salary.
3. Cash equivalent of leave standing to the employee’s credit (subject to a maximum of 30 days per year of service).
4. The limit notified by the government (currently ₹25,00,000).
Any amount exceeding this exemption limit becomes taxable as “Income from Salary” and must be shown in your ITR.
You can check the official details on the Income Tax Department portal here: