Leave Encashment Taxation Rules (Updated 2023 – new Rs 25 lakh Limit)

The government has offered some relief for retiring non-government employees. The leave encashment exemption rules (2023) in India have been changed at the exemption limit has been hiked.

The Budget 2023 has increased the tax exemption on leave encashment of non-government (private) salaried employees from Rs 3 lakh to a massive Rs 25 lakh. This is a great move for those who are/were able to accumulate a lot of earned leaves over the last several years of job. The full leave encashment received at the time of retirement / resignation is fully exempt for Central or State Government employee.

Leave encashment in India (2023) is when the employees are allowed to encash their unused, accumulated leaves during their employment tenure in the company. These are the leaves which are known as ‘earned leaves or EL’ and don’t lapse generally.

As per the existing Leave encashment tax calculation rules, the accumulated earned leaves can either be encashed during service or at the time of retirement or resignation. The leaves encashed during service are fully taxable and form part of ‘income from Salary’.

So let’s say you get 30 days of earned leaves every year. Now if you use only 5, then the remaining 25 will not lapse and will start accumulating add get added to the next year’s quota of your earned leave. Assuming you use just 5 out of 30 leaves each year, then after about 10 years, you would have accumulated about 250 earned leaves. Now if each day of EL is worth Rs 10,000 on encashment, the total leave encashment for 150 days will be 250 x Rs 10,000 = Rs 25 lakh.

If you now try to encash this at retirement, the entire Rs 25 lakh would be tax-free for you. Earlier the exemption threshold was Rs 3 lakh lakh – meaning that if encashed leaves are worth more than Rs 3 lakh, then the extra amount (Rs 22 lakh in this case as Rs 25 lakh – Rs 3 lakh) would be added to your salary for taxation as per your tax slab.

But with the increase in the threshold to Rs 25 lakh, there is potential for enormous tax savings at the time of leave encashment at retirement.

Only issue is that most companies put a limit on the number of leaves you can accumulate before there is automatic encashment. The money received is taxable. This means it will be added to your taxable salary, and the applicable tax will be deducted by your employer.

Also, the change has its own share of terms and conditions. The Annexure issued along with the Budget states that encashment of earned leave up to 10 months of average salary, at the time of retirement in case of an employee (other than an employee of the Central Government or State Government), is exempt under sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act (“the Act”) to the extent notified.

So that was about the leave encashment exemption at retirement (2023) for private sector employee in India.