leave encashment
21 min read
Tax exemption on encashed leaves
Subhasmita Behera
Posted on
Leave encashment meaning

According to labor laws, every salaried employee is guaranteed an annual minimum amount of paid leave hours. However, it is not required that a specific employee use all of the leave time to which he is entitled during the course of a single year. Most organizations allow their staff members to carry forward any unused paid leave time.

Depending on the circumstances, the employee would invariably be left with an accrued leave balance that had not been used at the time of the employee's retirement or departure from the company. This makes the organization compensate the employees for unused paid leave they have accrued. The term "leave encashment" is usually referred to this idea.

Types of leave

The company's policy on leaves typically outlines the various kinds of leave available to employees. The policies regarding time off vary from one organization to the next. The following are the different kinds of leaves that are typically offered to employees:

Casual leave: You can take casual leave for seven to ten days. These leaves are available for employees to use for their personal needs. The amount that can be cashed out of this leave varies from company to company.

Earned Leave or Privilege: An employee can use accumulated leaves provided they give prior notification to the authorities. After a predetermined amount of time has passed, these leaves will be for encashment. Different organizations have varying policies regarding this matter.

Medical leaves: Employees must inform their employers about taking medical leaves whenever they cannot fulfill their responsibilities to the organization due to their health. The upper limit on the number of medical leaves an employee can take varies widely from company to company.

Holiday Leaves: Employees decide whether or not to give holiday leaves, and these leaves do not result in a loss of compensation. The maximum amount of vacation days that an employee is eligible for varies from firm to firm.

Maternity leaves: Female employees are the only ones eligible for maternity leaves, which can last anywhere from 12 to 26 weeks, depending on the length of the pregnancy. An employee can request an extension, but no money will be paid for the additional time. But you can't turn these leaves to be available for encashment.

Sabbaticals: Employees can take time off during their sabbaticals to further their education and develop new skills. They can enroll in a class, and the employer will pay for their leaves of absence during the course duration.

Advantages of leave encashment

The option to encash unused leave provides employees with several benefits, including greater money that is obtained by employees, which may assist them in attaining their monetary objectives.

Encourages Employees to Work Since employees who participate in leave encashment have the opportunity to receive monetary compensation for unused leave days, this benefit encourages employees to continue working without taking an excessive number of leave days.

Because they know they will be reimbursed for their hard work through leave encashment, employees feel motivated to work harder and perform better because they know that they will be compensated for their efforts.

Facilitation of cash flow is offered to employees for more cash flow, which can be helpful in times of crisis as a result of this benefit.

And lastly, because employees are more likely to remain in an organization that offers such advantages, leave encashment can also serve as a tool for employee retention, helping to ensure employees do not leave an employer.

Tax benefits on leave encashment

Leave encashment during service

The timing of an employee's receipt of leave encashment determines whether or not the payment is subject to taxation. When an employee can encash their unused leave while still on the job, the amount received is considered 'Income from Salary' and is subject to full taxation. However, you may be eligible for some tax incentives under Section 89 of the Income Tax Act. To claim the tax reduction associated with leave encashment, you must fill out form 10E. You can fill out and submit this form online on the federal government's website for filing income taxes.

Leave encashment during retirement or resignation

The leave encashment received by the central or state govt. Employees are fully exempted from tax. Leave encashment received by non-govt employees is partly exempted and partly taxable. The exemption is given according to the calculation specified in Section 10(10AA)(ii). Leave encashment received by a legal heir of a deceased employee is fully tax-exempted from tax.

Additionally, the Leave encashment amount received by the Legal heir of a deceased employee is subject to full tax exemption in the hands of the legal heirs.

Budget 2023 update

To a certain extent, non-government employees are excused from paying taxes on the amount of leave they take. Since 2002, the limit has been set at Rs. 3 lakh, but it has recently been raised to Rs. 25 lakh due to the general growth in income from salary.

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