Tax Rules on Leave Encashment: The government considers the amount you get on encashing holidays as a part of your income, hence the government has made some rules for tax on leave encashment.
Whether the job is government or private, during the job the employee gets many types of leaves like Casual Leave-CL, Medical Leave, Earned Leave, Maternity Leave etc. Some of these holidays lapse if they are not taken within the stipulated time and some holidays are added to the new financial year. On retirement or leaving the job, employees can get these leaves encashed. Therefore, more and more employees try to save these holidays.
The government considers the amount you get on encashing leave as part of your income, hence the government has made some rules for tax on leave encashment. These rules are different in case of government and private jobs. If you are also employed, then you must be aware of these rules.
These are the income tax rules on leave encashment
On encashing leave during employment
If leave encashment is done during employment, then that amount is considered a part of their salary and becomes taxable. Whatever amount you receive on encashment during your job, the entire amount is added to your income. After this, tax is collected according to the income tax slab you fall in. However, relief can be taken under Section 89 of Income Tax. But to avail the benefit under Section 89, there are some necessary conditions which have to be fulfilled like – You must have been in continuous service with the same employer for at least 5 years before the year in which you encash the leave. Apart from this, the amount of leave encashment should not exceed the salary of the month in which you receive it.
On getting encashment done after retirement or leaving the job
If you get your leave encashed after retirement or leaving the job, then its rules are different for those in government jobs and private jobs. Know here-
If you have a government job: If you are an employee of the Central or State Government and get leave encashment done at the time of retirement or resignation, then no tax will be charged on that amount, no matter what the amount is. There is no tax on the amount of leave encashment received by an employee’s legal heir when he passes away while on duty.
If you have a private job: If you are a private sector employee and get your leave encashed at the time of retirement or after leaving the job, then there is no tax on the amount up to Rs 25 lakh. Earlier this limit was Rs 3 lakh. The excess amount is taxed as per your regular income tax slab.
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