Union Finance Minister during her annual Budget speech made a slew of announcements on 1 February. One of the major announcements was regarding the new leave encashment exemptions that made the headlines. FM Sitharaman proposed to hike tax exemption on leave encashment on the retirement of non-government salaried employees to ₹25 lakh from ₹3 lakh.
Days later, revenue secretary Sanjay Malhotra told Times of India, “The ₹22 lakh benefit at 30% plus works out to almost ₹7 lakh”. Malhotra said if one spread the exemptions for over 30-35 years, it works out to more than ₹20,000 a year.
According to Malhotra, 50% of personal income taxpayers are salaried class. Hence the new leave encashment exemptions will benefit them at the time of retirement whether they choose the new tax regime now or the old today.
What is leave encashment?
As per India’s labour law, every salaried person is entitled to a minimum number of paid leaves every year. However, not all those leaves are utilised by an employee in a year.
Now, these unutilised paid leaves usually get carried forward to another year. As a result, an employee will be accumulated with unutilised leaves balance at the time of retirement or resignation. Henceforth, the employer is compelled to compensate the unutilised paid leaves of employees. This is known as leave encashment.
Is leave encashment taxable?
Yes, the leave encashment is taxable as per the law. If an employee receives sleave encashment during his/her job, the amount forms part of ‘income from salary’. However, one can claim some tax benefits under Section 89 of the I-T Act. One needs to fill out form 10E to claim tax relief for leave encashment.
Since the Centre has hiked tax exemption on leave encashment on the retirement of non-government salaried employees to ₹25 lakh, it would help lakhs of employees in saving their capital.
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