Non-Government Salaried Employees Can Now Encash Leave Up to Rs 25 Lakh Tax-Free

Did you know that the tax exemption limit on leave encashment for non-government salaried employees has been increased to Rs 25 lakh? New limit's effective date? Get the latest details here.

Leave Encashment
  • Tax exemption limit on leave encashment increased to Rs 25 lakh
  • Previous limit was Rs 3 lakh
  • Change effective from April 1, 2023
  • Move aims to provide financial relief to non-government employees
  • Employees can claim exemption under Section 10 (10AA)(ii) of the IT Act

In a significant development, the central government of India has announced a substantial increase in the tax exemption limit on leave encashment for non-government salaried employees. This move, which was initially proposed in the union budget for the fiscal year 2023-24, has now been officially notified in the gazette. Effective from April 1, 2023, the new limit marks a significant milestone in tax reforms, aiming to provide greater financial relief and tax benefits to employees (non-government). With this change, individuals can now enjoy an increased ceiling of Rs 25 lakh for tax deduction on their earned leave encashment. This article delves into the details of this exciting update, outlining its implications and offering insights into the potential advantages for eligible employees.

What is the existing limit for tax exemption on leave encashments?

Salaried employees in private companies, also known as non-government salaried employees, previously benefited from a tax benefits on leave encashment amounting to a maximum of Rs 3 lakh. Consequently, when retiring or leaving their job, these employees were not liable to pay taxes on leave encashment up to Rs 3 lakh.

Also ReadRetirement Benefits: Do you have to Pay Taxes on PF and Gratuity?

What was the need to revise the limit for tax exemption (or reduction) on leave encashments?

During her budget speech, Finance Minister Nirmala Sitharaman revealed that the Rs 3 lakh limit for tax exemption (benefits) on leave encashment was set in 2002, coinciding with the highest basic pay in the government being Rs 30,000 per month. Any amount exceeding this limit in leave encashment for employees (non-government) would be subject to taxation. It was not uncommon for leave encashment to surpass the Rs 3 lakh threshold, especially considering the accumulation of leave balances over multiple years.

What does the finance ministry circular state?

As per a circular issued by the finance ministry, the Central Government has exercised its powers granted by sub-clause (ii) of clause (10AA) of section 10 of IT Act, 1961 (43 of 1961) to specify a limit of Rs. 25,00,000 for employees mentioned in that sub-clause who retire, whether on superannuation or otherwise. This limit is based on the maximum amount of cash equivalent of leave salary that the employees can receive in respect of the earned leave period at their credit during retirement. The notification came into effect from April 1, 2023.

How to claim tax exemption for leave encashment?

For individuals employed in the private sector, the leave encashment amount received post-retirement or resignation is categorised as "Income from Salary" and is subject to taxation. However, under Section 10 (10AA)(ii) of the Income-tax Act, they are eligible to claim an exemption. This exemption applies to any payment received as leave encashment during retirement or upon leaving the job, up to the lowest value among the specified sums in Section 10 (10AA)(ii). Notably, the previous limit of Rs 3 lakh has been revised, and the ceiling for tax exemption on leave encashment has been increased to Rs 25 lakh.

Note: It is important to note that the revised exemption limit considers any tax exemptions that the employee may have already received in previous years under section 10(10AA)(ii) of the Act. As a result, the amount eligible for tax exemption will be reduced by any exemptions that were previously allowed.

Also ReadBudget 2023: A steep rise in leave encashment limit for non-government staff

The substantial increase in the tax exemption limit on leave encashment for employees (non-government) in India is set to provide greater financial relief. With the limit raised to Rs 25 lakh, this step is expected to encourage increased productivity and motivate individuals to work more, ultimately enabling them to save more for the future. It marks a significant milestone in tax reforms, benefiting employees and contributing to their overall financial well-being.


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