Taxability on Leave Salary under Section 10(10AA) of Income Tax Act

Leave salary also known as leave encashment which means that employee will receive the cash for leaves which are not taken by the employees. Employee can encash his leaves during the course of employment but this amount will be fully taxable or he can encash at the time of retirement but the taxability of that amount depends on fulfillment of the certain conditions given under the income tax act.

Also Read Income Tax Calculation on Pension Income 

For Government Employees except local authorities leave encashment at the time of retirement is exempted from the tax u/s 10(10AA). While leave encashment during the service period is taxable for all the employees and its taxable as per the income tax slab rate which is applicable to that individual.

  1. At the time of services:

    Amount received Fully Taxable

  2. At the time of retirement:
    1. Government employee (central or state) – Fully exempt
    2. Non-Government employee

      Exempt least of the following:

  • Actual Receipt
  • Standard Limit=3,00,000 (maximum- reduced by an earlier exempted amount)
  • Total salary of preceding 10months from the date of retirement
  • average salary of 10months X leave credit

Calculation of Leave credit at the time of retirement

Leave entitlement- completed service X standard leave (consider max. 30 days)

Less: Leave already availed

Less: Leave encashed during the service period

Leave credit at the time of retirement

  • (Leave credit should be in according to 30 days leave of every year of actual completed services)

Note: – salary= Basic pay + DA (if) + commission (%)

Average salary= (Basic pay + D.A.(if)+ % commission of 10 months immidetly @preciding from the date of retirement)/10

Read Meaning of Basic Salary for HRA Calculation

12 thoughts to “Taxability on Leave Salary under Section 10(10AA) of Income Tax Act”

  1. I got leave salary of Rs. 65000/- on 31.03.2013 and now i m working , i want to know that is that amount taxable OR not

    1. If you are working in same company or still employeed with same employer then leave salary is fully taxable for Year 2012-13 i.e AY 2013-14.
      But if you left the job which is same as retirement then Leave salary
      Exempt least of the following:

      Actual Receipt
      Standard Limit=3,00,000 (maximum- reduced by an earlier exempted amount)
      Total salary of preceding 10months from the date of retirement
      average salary of 10months X leave credit

  2. Hi every One, Please let me now on retirement whether leave encashment amount 5,00,000 is Fully taxable or Exempted.. if exempted then how much amount is for exemption.

  3. Leave Encashment ,at retirement, is taxable above 3,00,000/00 for employees of “Private Companies”. What about “PSU employees”,whose pay is fixed by Sixth Pay Commission
    like “Central Government Employees”,whose leave encashment at retirement is entirely tax free ?

  4. My father is retired person. In ITR 2013-2014, where to fill deductions under leave encashment at the time of retirement?

  5. Sir,
    I got leave salary of Rs. 263773 on 10/8/2013 and left the job as retirement. I want to know that is amount is taxable or not. Please calculate taxable amount

    1. Leave Salary Less least of the following:

      Actual Receipt
      Standard Limit=3,00,000 (maximum- reduced by an earlier exempted amount)
      Total salary of preceding 10months from the date of retirement
      average salary of 10months X leave credit

  6. I worked in A Company (Non-Govt) till May 2013 and resigned. Got Some Amount under Leave Encasment from that company. In Jun 2013 Joined a new Company (Non-Govt) and shall continue.
    Please inform I’m entiteled for TAX rebate under Section 10(10AA) for the amount received as Leave Encashment or not.

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