Earned leave encashment act
August 3, by Research Desk Personal Finance , Retirement Planning , Tax Planning. Anurag Basu has been working with a private company for 25 years and will be retiring in March He has some leaves under his credit and would like to encash those leaves at the time of retirement.
Leave Salary encashment Exemption, Calculation, Download calculator
He also wanted to know about the actual amount he will receive as leave encashment and the tax implication on the amount received. A lot of us will have similar queries on leave encashment and its tax implications. In this article, I will give you a brief introduction on leave encashment, various events under which you can encash your leaves and the tax implication on leave encashment for the Government and Non-Government employees.
Among them, there are leaves which you can carry forward to the succeeding year such as earned leave and some of them cannot be carried forward like casual leave, compensatory leave. Encashment of leaves against the leaves not availed by the employee is known as Leave Salary. The number of leaves allowed to be taken and the leave encashment varies from employer to employer based on their leave policy.
An employee can avail for leave encashment under the influence of any of the event mentioned below:. For the calculation of Tax liability under Section 10 10AA of the Income Tax Act, on leave encashment, employees are categorised into two classes:.
Government employees State and Central Government employees 2. Leave encashment during the service tenure is fully taxable in the hands of the Government as well as the Non-Government employees in the year of encashment. However, relief under Section 89 if applicable can be availed by the employee. This is further based on the above classification of employees: Ajay Ratra is a Government employee and he is entitled to 28 days of leave per year.
He has a credit of days of leave in his account. He retired in the year and received Rs.
Incomes Exempt from Income Tax
In this scenario, the entire amount received by Mr. Identification of the number of days of leave entitled for each service year as per the service rules leave entitlement should not exceed a maximum of 30 days in a service year For instance, if leaves are credited at the rate of 40 days in a service year, then for the computation purpose in Step II, it should be restricted to 30 days per year.
Leave Encashment under Labour law - Labour & Service Law
On the other hand, if the leaves are credited at the rate of 25 days in a service year, then the computation should be done taking into account; 25 days. Identification of the leaves availed or encashed during the period of service In Days Step V: Computation of the period of earned leaves In Days Step III — Step IV Step VI: Computation of the period of earned leaves by dividing the number of days arrived in Step V by 30 In Months.
Average monthly salary is computed from the monthly salary drawn by the employee in the past 10 months immediately preceding the retirement i. Salary includes the below components:. Apart from the above elements, no other allowances or perquisites are taken into consideration.
A Guide to understanding your Salary and its Tax Implications. Let me take you through an illustration to understand the above calculation: Rakesh Malya is a Non-government employee and has retired on June 30, His total service tenure is 30 years and 8 months. In agreement with his service rules, he is entitled to leave of 40 days per year for completed year of service.
Below table represents some other details on leaves and salary: Assuming that his salary has not changed in the past 1 year. To arrive at the total taxable Leave salary for the above example, 4 different computations are required: Computation of cash equivalent to earned leaves 2. Computation of Leave salary exempt under Section 10 10AA ii 4.
Computation of total taxable Leave salary. There are 3 steps involved in the computation of the cash equivalent to earned leaves:. Compute the period of earned leaves in months:. In the above example, Mr. Rakesh Malya is entitled to avail 40 days leave per year for completed year of service.
However, as per the rule if the leave encashment exceeds 30 days in a year, then it should be restricted to 30 days for the computation purpose. Below table illustrates the computation:. Compute cash equivalent to earned leaves:. It is computed by multiplying the average monthly salary to 10 months i.
From the above table, the amount of leave salary exempted under Section 10 10AA ii is Rs. The amount received on leave encashment is fully taxable in the hands of both the Government as well as the Non-government employees. Atul Sahani retired from the company ABC Ltd. Post his retirement from ABC Ltd; he joined another company XYZ Ltd. He retired from XYZ Ltd. In such a scenario, the maximum amount available for exemption from XYZ Ltd.
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