How to Save Tax Levied on Enchased Leaves?

The Buyt Desk 

Leave is the most astonishing word for the employed population. Three types of leaves a service individual gets during his employment, i.e., casual leaves, sick leaves, and paid leaves. Some organizations keep this in two categories, sick and paid leaves, under different names. The number of leaves an employee gets in an organization depends on the leave policy of that organization, but a minimum of 10-12 days is mandatory. All employees do not have to use all leaves entitled to them. The unused paid leaves get carried forward, which can be enchased or used to reduce the notice period served during resignation or retirement, depending on the policy. In general, unused paid leaves can be redeemed only at the time of resignation or retirement. However, many organizations have different rules regarding the encashment of these leaves. Nonetheless, any leave encashed during employment is taxable.

It means you will have to pay tax for all the leaves you encash during employment according to the tax slab you fall.

Do Not worry! There is a scape way present for you!

Use Section 89 of the Income Tax Act for Leave Encashment Exemption

For the central and state government employees, the leave enchased at the time of retirement or resignation gets complete tax exemption. And non-government employees can get a partial exemption on tax using section 89 of the Income Tax Act. Let’s dig deep to know how.

Leave Encashment Policy Differs in Organization

Some organizations give the option to adjust leave in the notice period employees have to serve when they resign, while some give leave encashment options. If you choose the second, the amount earned on the encashment of balance leave gets taxed as per your tax slab.

You can use section 10(10AA) (ii) to get tax exemption. According to the section, you can take exemption from the lowest of the following.

• The actual amount received or Rs 3,00,000.

• Average of last ten months’ salary.

• The number of unavailed leaves * 10-month average salary.

• Salary per day * unutilized leave (considering a maximum of 30 days leave per year) for every year of completed service

The average salary is an amalgamation of basic salary, dearness allowance, and commission. The leave credit means the number of leaves availed minus the number of leaves granted.

Example. Mr. A’s salary is 1 lakh/month. He has 100 balance leaves out of 150 after two years of work. Mr. A’s calculation for tax exemption under section 10 (10AA) (ii) would go this way.

The lowest here is leave encashment received, i.e., Rs. 333,332. The leave encashment taxable as income from salary would be 333,332-300 000 = Rs 33,332.

Note: The figures taken here are rough and only for the example.