Encashment of Earned Leave

Encashment of earned leave

  • Leave encashment during service is taxable in full in all cases.
  • Any payment received by a government employees in consideration of leave not availed by him is fully exempt.
  • Leave salary paid to legal heirs of the deceased employee in respect of earned leave standing to the credit is not taxable.
  • Any payment received by any other employees in consideration of leave not availed by him is exempt to the extent of least of the following
  1. 10 months salary on the basis of average salary of 10 months proceeding his retirement
  2. Amount of salary on the basis of average salary for the approved period for which earned leave not availed by him.
  3. Amount actually received
  4. Rs 3,00,000

 

Here, salary includes basic Salary, DA if given under the terms of employment and commission based on fixed per cent of turnover

Approved period means leave entitlement not exceeding 30 days for every year of actual service with the employer paying the leave salary.

encashment of earned leave

Sample;

Q:

Mr. raj retired from a company after completing 20 years of service on November 1 and received leave salary of rs 6,00,000.he has 8 months earned leave on his credit(on the basis of 30 days per year)compute the amount of taxable leave salary from the following information.

Salary

From January to June: 14000 PM

From July to March: 15000 PM

DA: 2000 PM

He has 6 months earned leave to his credit (on the basis of 30 days per year)

A:

Salary for 10 months on the basis of average salary(16400X10) 1,64,000
Cash equivalent of leave to the credit at the time of retirement(16400X6) 98,400 
Actual amount of leave salary subject to a maximum of 3,00,000(as it exceed maximum limit) 3, 00,000

 

Here the least amount is 98,400, so taxable amount of leave salary is

(6, 00,000-98,400)                         =5, 01,600

note:

Average salary of 10 months

January to June (14000X6)

84000

 

July to October (15000X4)

60000

DA (2000X10)                        

20000

Total

164000

Average salary=164000/10

16400

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