income tax
Leave encashment refers to the monetary compensation received for unutilized leave days by an employee. Organizations typically offer various types of leaves, which include:
Most types of leave, except Earned Leave, lapse at the end of the year if not taken. In contrast, Earned Leave can be carried forward to subsequent years.
Earned Leave is accrued by employees for additional days worked and can be utilized for vacations or personal events that are not designated holidays. According to labor laws, all organizations are mandated to provide Earned Leave, which can also be converted into cash through the process of Leave Encashment. Typically, it is the Earned Leave that gets encashed by employees.
It is important to note that funds received from encashing Earned Leave are subject to taxation. However, the Income Tax Act, 1961 provides specific exemptions related to Leave Encashment.
Under the Income Tax Act, 1961, the total amount received as Leave Encashment is generally taxable. The following details outline exemptions related to Leave Encashment as specified under Section 10(10AA):
Leave Encashment During Employment: Any leave encashment received while still employed is fully taxable, regardless of whether the individual is a government employee or not.
Leave Encashment on Retirement or Resignation: