Leave encashment is a financial benefit provided to employees for unused leaves. However, it is treated as part of their salary and is subject to taxation. Employees can seek tax relief on leave encashment under Section 89 of the Income Tax Act, making it essential to understand the tax implications and eligibility criteria. This provision helps employees reduce their tax burden while benefiting from their accrued leave balance. Recognising the rules and exemptions associated with leave encashment can assist individuals in planning their finances effectively.

• Leave encashment is the payment for unused leaves treated as part of salary.
• It is taxable under the Income Tax Act for both private and public sector employees.
• Tax relief can be claimed under Section 89 to reduce the tax liability on leave encashment.
• Government employees enjoy full exemption on leave encashment, while private employees have specific limits.
• Proper documentation and compliance are essential for availing tax benefits.
• Understanding tax exemptions helps in effective financial and tax planning.

For government employees, the entire amount received as leave encashment is fully exempt from tax. In contrast, non-government employees can avail of partial tax exemptions, with the exempt amount being the lower of:

1. Actual leave encashment received.
2. Rs. 3,00,000 (maximum limit).
3. Ten months' salary based on the last drawn salary.
4. Salary for the leave period (calculated as earned leave multiplied by the daily salary).

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Leave encashment refers to the compensation employees receive for unused leave days. This benefit is typically provided when employees choose not to utilise their earned leave or upon leaving the organisation due to resignation, retirement, or termination. It allows employees to monetise their accrued leave balance as per the company’s leave policy.

1. Earned Leave (EL): Granted based on the number of days worked, it is typically used for planned vacations or personal matters.
2. Casual Leave (CL): Short-term leave for unforeseen situations, such as personal emergencies or urgent matters.
3. Sick Leave (SL): Allows employees to take time off during illness or for medical reasons, often requiring a medical certificate.
4. Maternity/Paternity Leave: Provided to new parents for childbirth or adoption, with maternity leave often extending to 26 weeks under Indian law.
5. Privilege Leave (PL): Accrued over time and can often be carried forward to the next year or encashed upon resignation/retirement.
6. Compensatory Off: Offered to employees who work on holidays or during non-working hours, allowing them equivalent time off later.
7. Study/Examination Leave: Granted to employees pursuing further education or professional exams to focus on their studies.

• Understand leave encashment policy: Review your employer’s policy to know the eligibility criteria, encashable leave types, and conditions.
• Check leave balance: Verify the number of accumulated leaves eligible for encashment through the HR portal or by contacting the HR department.
• Submit a request: File a formal application or request, either online or offline, for leave encashment as per company procedures.
• Provide documentation: Submit any required documents, such as resignation or retirement letters, depending on the context of the encashment.
• Calculation of encashment amount: The employer calculates the encashment amount based on salary and the number of days of leave encashed, adhering to policies and tax rules.
• Tax deduction: The organisation deducts taxes as applicable under Section 10(10AA) of the Income Tax Act, with exemptions for eligible cases.
• Payment process: The leave encashment amount is credited to the employee’s bank account after processing, typically along with the final settlement in exit cases.

Leave encashment provides employees with a financial cushion by monetising unused leave balances, offering a significant benefit during employment or retirement. It is essential to understand its tax implications under Section 10(10AA) to optimise exemptions and reduce liability. By carefully planning leave usage and encashment, employees can balance work-life priorities while securing financial gains. Employers should ensure transparent policies to help employees maximise this valuable benefit effectively.

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