LEAVE ENCASHMENT

1.     Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.

2.     Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.

3.     In case of other employees, the exemption is to be limited to the least of following:

     (a)   Cash equivalent of unutilized earned leave (earned leave entitlement cannot exceed 30 days for every year of actual service)

     (b)   10 months average salary

     (c)   Leave encashment actually received. This is further subject to a limit of Rs.3,00,000/- for retirements after 02.04.1998.

4.     Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.

 Average monthly salary:-

Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement. While calculating completed year of service, ignore any fraction of the year.