Leave Encashment

Leave Encashment refers to the amount of money obtained in exchange for the period of leave not availed by an employee. Encashment of an accumulated leave can be taken by an employee at the period of retirement or at the time of resignation. The leave encashment scheme is different in different companies. Some companies allow the worker to carry forward their leaves to the subsequent year whereas some companies pay for the non-availed leaves in the next curriculum year. The nature of the employer decides the income tax procedure of the amount accepted towards leave encashment.

Benefits of Leave Encashment

Proceeds collected for leave encashment will be charged only if received and if the employee is in service.

Amount collected on account of leave encashment will be entirely payable in your hands if you withdraw a job due to termination or resignation.

The value earned from leave encashment is managed as income from payroll and taxed equally at the particular tax slab rate relevant to the employee.

For government employees, the amount taken towards leave encashment at the period of retirement is exempted from tax.

For non-government representatives, the amount released on retirement is the least of the following:

a. Exact leave encashment leave

b. 10 months’ normal pay

c. Cash equivalent of unutilized earned leaves.

d. 3 lakh-the highest amount defined by the government.

Leave encashment received by a legal heir of a deceased employee is not taxable.

According to a ruling of the Bombay High Court, leave encashment received on resignation will be exempted from the tax based on the specified limits.

Employees can take the exemption for the amount received by them even on retirement or resignation for encashment of their leaves. However, this is to be taken care of that if any exemption is to be availed on their earlier occasion.

For example, if an employee has received leave encashment in any one or more financial years and had availed any exemption previously in respect of the same. In such a case, the limit of Rs. 3 lakh will be reduced by the amount of exemption availed earlier.