Details regarding Leave Encashment- relating to Income Tax

IS the leave encashment income taxable under IT Act, 1961 when an employee resigns from a private organisation? As per my understanding, the leave encashment is not taxable under Section 10 (10AA), is that right?

Encashment of the paid leave you have not utilised is known as ‘leave salary’.

Tax treatment on this leave salary depends on two situations:

1. If you are still employed while encashing: leave salary is taxable, irrespective of whether you are an employee with the Government or private services.

2. If you are leaving the organisation: The entire amount of leave salary is tax-free provided you are a government employee. However, for a private sector employee, leave salary is partly exempted (under Section10(10AA) up to the least of the following:

a. Cash equivalent of the leave salary in respect of the period of earned leave standing to the credit of employee at the time of retirement/superannuation (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired); or

b. ’10 months’ ‘average salary’; or

c. Rs 3 lakh (applicable from 1 April ’98)

d. The amount of leave encashment actually received at the time of retirement.

Is the leave encashment exempt only on retirement or also on resignation?

Section 10(10AA) clearly states, “on retirement or otherwise”; the catch word here is ‘otherwise’, which suggest there are certain exemptions in the case of a person leaving his job for reasons other than retirement.

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