Understanding Leave Encashment Rules: Tax Implications for Private Employees

Leave encashment allows employees to convert unused paid leave into cash. While this benefit is attractive, its tax treatment differs significantly between government and private sector employees.

Key Highlights:

• Government employees: Leave encashment received at retirement is fully exempt under Section 10(10AA).
• Private sector employees: Taxable, with exemption capped at ₹25 lakh (lifetime limit).
• During service: Any leave encashment received while employed is fully taxable as salary income.
• At retirement/resignation: Exemption available, but limited to the least of:

Actual leave encashment received

• ₹25 lakh (lifetime cap)
• 10 months’ average salary
   
• Cash equivalent of earned leave (up to 30 days per year of service)
• Tax regime impact: Rules apply under both old and new regimes, though exemptions are calculated differently.
• Planning tip: Employees should track cumulative exemptions to avoid surprises at retirement.

India’s growing workforce must be aware of these distinctions to plan finances effectively and avoid unexpected tax burdens.

Sources: The Financial Express, Shine.com, ClearTax