Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
During service vs on exit
If you encash leave while still employed, the whole amount is taxable as salary. The concession is only for encashment at retirement or resignation, where an exemption applies. This distinction catches people who cash out leave mid-career expecting it to be tax-free.
The exemption on exit
For a non-government employee, the exempt amount on exit is the least of: the actual encashment; ₹25 lakh (raised from ₹3 lakh); the cash equivalent of up to 10 months’ average salary; and a per-year formula. Government employees get a full exemption. Confirm the current ₹25 lakh ceiling and formula.
A worked example
Example: you retire with ₹8 lakh of leave encashment from a private employer. If the formula limits give, say, ₹6 lakh, that is exempt and ₹2 lakh is taxable. By contrast, ₹8 lakh encashed during employment would be fully taxed. The exemption is available in both regimes. Our team can work out the exempt portion.