Leave
salary, also known as leave encashment, means that employee will receive the
cash for leaves which are not taken by the employees. The leave encashment received
during the service period is taxable for all the employees as per the income
tax slab applicable to the employee. However, the tax treatment is different
for the leave encashment received at the time of retirement/ superannuation. Further,
the tax treatment is different for Government employee (Central or
State) vis a vis Non –Government
employee as under:
· In the case of Central/ State Government employee,
any amount received as cash equivalent of leave salary in respect of period of
earned leave at his credit at the time of retirement/ superannuation is fully exempt from tax u/s 10(10AA)(i).
· In the case of Non-Government employee (i.e., the
employee other than an employee of the Central Government or a State
Government) leave salary is exempt from the tax u/s 10(10AA) (ii) to the extent
of the least of the following:
i] Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired): or
ii] 10 month “Average Salary” or
iii] The amount not chargeable to tax as specified by the Government. (Presently, Rs. 3 Lacs has been specified).
iv] Leave encashment actually received at the time of retirement.
Average salary, as mentioned above, is to be calculated on the basis of average salary during the period of 10 months immediately preceding the retirement/ superannuation.
”Salary” here means basic salary & includes dearness allowances if term of employment so provided. It also includes commission based on a fixed percentage of turnover achieved by an employee as per term of contract of employment but excludes all other allowances & perquisites.
i] Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired): or
ii] 10 month “Average Salary” or
iii] The amount not chargeable to tax as specified by the Government. (Presently, Rs. 3 Lacs has been specified).
iv] Leave encashment actually received at the time of retirement.
Average salary, as mentioned above, is to be calculated on the basis of average salary during the period of 10 months immediately preceding the retirement/ superannuation.
”Salary” here means basic salary & includes dearness allowances if term of employment so provided. It also includes commission based on a fixed percentage of turnover achieved by an employee as per term of contract of employment but excludes all other allowances & perquisites.
Now, with above
basic brief up about taxability of leave salary, the opinions on the issue
raised in your queries are as under:
1.
Leave
salary received at the time of retirement is exempt only in the hands of State
or Central Government employee. It will not be exempt in the hands of the
employee of PSU or Local Authorities. The definition of “Government Employee”
is not specifically given in the Income Tax Act-1961. However, the Act has
specifically incorporated the PSU employees, Government undertaking employee, Local
Authorities employees etc in various other Sections / clauses in the Income Tax
Act-1961 where the benefit is meant to be conferred to them. The same is not
there in Section 10(10AA).
2.
The
Leave Salary is taxable under the head “Income from Salary”. The Salary Income
is taxable in the year in which it has accrued or in the year in which it is
received, whichever is earlier. Accordingly, the leave encashment is taxable as
income of the FY 2012-13 and not FY 2013-14.
TAXABILITY OF
LEAVE SALARY AT A GLANCE:
|
S.No.
|
Particulars
|
Tax
Treatment
|
|
A]
|
Encashment of
leave during service
|
It is charged
to tax.
|
|
B]
|
Encashment of
leave at the time of retirement
|
|
|
|
1. If Central
or State Government Employees
|
Fully exempt
from tax u/s 10(10AA)(i)
|
|
|
2. For any other
employees
|
Lease of the
following is exempt:
1. Earned leave months x Average salary
2. Avg.
monthly salary x 10
3. Maximum
amount Rs. 3,00,000/-
4. Actually
received
|
