Have you taken all leaves from your Leave Bank ? or Have some leave left in your account ? if so then why dont you encash them according to your leave policy. Leave Encashment is another way of motivating employees to take less leave and work more. But do you know you need to pay tax on leave encashment amount.
Leave encashment is considered as perquisite as per income tax act. Find here its taxability calculations.
VALUATION OF LEAVE ENCASHMENT FOR PERQUISITE PURPOSE U/S 17(2)
- Leave encashment while in service: It is fully taxable as income of previous year in which it is encashed, however relief u/s 89(1) is available for such encashment.
- Leave encashment on retirement : if an individual receives leave encashment on his retirement ,then the amount received will be eligible for exemption. The amount of exemption is based o his employment, whether he is govt employee or non govt employee
| Particulars | Nature of exemption |
| Government employee | Entire amount is exempted from the tax |
| Non government employee | Entire for exemption as calculated below |
- computation of exemption from leave encashment for non government employees
| Particulars | Amount |
| 1. Computation of salary for leave encashment exemption(Salary means 10 months average salary preceding the month of retirement.), | . |
| Basic salary for 10 month | XX |
| DA considered for retirement benefits for 10 month | XX |
| Commission forming part of salary as fixed percentage of turnover for 10 months | XX |
| 10 MONTH SALARY | XXX |
| SALARY FOR ENCASHMENT EXEMPTION=10 MONTH AVERAGE SALARY | XXXX |
| Particulars | Amount |
| (a) If Employer has sanctioned leave to the employees in excess of 30 days for every completed year of services, | |
| Calculate( leave sanctioned per year by the employer -30 days) x no. of completed year of service | |
| i.e Leave credit on the basis of 30 days credit for completed year of services | XXXX |
| (Leave salary on the basis of 30 days credit =step 2(a)x 10 mths avg salary)/30 | XXXX |
| Particulars | Amount |
| (b) If Employer has sanctioned leave of 30 days or less for every completed year of service
(Leave Balance on Retirement x 10 months Average Salary)/30 |
|
| 3.Taxable leave salary on retirement | |
| Amount actually received | XXXX |
| LESS: exemption u/s 10 (10AA)=Least of the following- | |
| Actual amount of leave encashment compensation received | XX |
| Average salary of individual for the past 10 month x 10 month | XX |
| Rs 3 00 000 | XX |
| Leave credit at the rate of 30 days p.a for every completed year of services as per step 2(a)/2(b) | XX |
| Taxable value | XXXX |
Please comment for any query on Leave Encashment.
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I have found you site recently in the google search.
I have a question.
I am a govt employee. Recently, I receive encashment of leave for 10 days during enjoying LTC. The official authority stated that the encashment of leave will attract income tax but I can claim relief u/s 89. Please say, how could I calculate the relief u/s 89 as the leave pertains to different financial year.
I render 15 years continuous service in govt. and taken several Earned Leave during the period. How could I prove the leave for encashment pertains to particular financial year.
Please have your say.
KVS Naidu
U/s 17(2) leave encashment while in service is fully taxable as income of previous year in which it is encashed .However relief u/s 89(1) is available for such encashment.
You can Refer this article for more clarification on how to compute tax on arrears https://www.investsaver.com/income-tax-relief-for-salary-arrears/
The relief should be claimed by the employee by way of declaration in the prescribed Form 10E. Such claim can be made to the employee at the time of making TDS. The employee is bound to consider the claim of relief u/s 192(2A).
Sir, You will have to segregate the income for different years and accordingly claim for the rebate.