Tuesday, October 01, 2013

Leave Salary Encashment

As per Service rules every employee is entitled to certain no. of leaves per annum. If an employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form during the continuity of employment or on retirement, it is known as leave salary.
Tax implications:
 As per the provisions of Section 10(10AA) of the Income Tax Act, 1961 (the Act), the amount received towards leave encashment from the employer is taxable as salary income of the employee.
However, the Act also provides for certain exemptions in respect of leave encashment to an employee, subject to specified conditions. These provisions can be categorized separately for government employees and non-government employees.
(A)Leave salary received by any employee during the period of service: Leave salary received by any employee during the period of service is fully taxable. However relief under section 89 read with rule 21A can be claimed.
(B)Leave Salary to at the time of Retirement /superannuation or otherwise.
(i) Leave salary to Central/State Government employee:  Leave salary given to Central/State Government employees at the time of retirement /superannuation in respect of period of earned leave at his credit ,is fully exempted.{section 10(10AA)(i)}
(ii)Leave salary given to other employee (non Central/State Government employee is exempted as per detail below. {Section 10(10AA) (ii)}: Least of following will be exempted.
a)      Leave encashment actually received. 
b)      Last 10 Month average salary. (Average salary explained below)
c)       Maximum amount fixed by the Government from time to time i.e. Rs. 3, 00,000.
d)      Cash equivalent of salary in respect of the period of earned leave standing to the credit of the employee only at the time of retirement whether on superannuation or otherwise calculated maximum by 30 days maximum for every year of actual service rendered to employer from whose he has retired.
Calculation of leave standing to the credit of an employee at the time of retirement or leaving the job:
Step (a) – Find out duration of services in number of years (ignore any fraction of year).
Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).
For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service. 
Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:-
Step (a) × Step (b) minus Step (c) ÷ 30
Calculation of 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.
(iii)Leave Salary paid to Legal heirs of deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
(iv)Leave salary received by family of Government employee who died in harness, is not taxable in hands of the recipient.


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