IF any employee gets leave encashment amount during his or her service then it will be consider as fully taxable as a part of ‘income from Salary’.
In a case employee can get a tax benefit under section 89(1)
As per Section 89(1) if an employee get his salary as arrears or in advance or any back financial year salary for more than 12 months then in this case his income is assessed at a rate higher than at which it would have otherwise been assessed. Tax relief is granted by the Income-tax Officer by an application made to him in this behalf
In respect of amounts received on encashment of leave salary while in service was considered by the Board. The Board are advised that relief under section 89(1) read with rule 21A of the Income-tax Rules would be admissible in respect of encashment of leave salary by an employee when in service. The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted, by insertion of clause ( 10AA ) in section 10, by the Finance Act, 1982 with effect from 1-4-1978.
- For Central or State Government employee Leave encashment amount received at the time of retirement or resignation is fully exempt
- For Legal heirs of deceased employee is fully exempt
For Non Government employee Leave Exemption and computation provided under Section 10(10AA)(ii)
As per the Income tax rule least of the below will be consider for the Tax Eemption
A. Amount Notified by the Government ie INR 3,00,000
B. Actual Leave Encashment amount received INR XXXX
C. Last 10 Month Average Salary INR XXXX
D. Leave Balance*Salary per day INR XXXX
Here salary means Basic Salary +Dearness allowance and for per day salary calculation consider 30 days leave as per year
The notified amount of INR 3,00,000 is the aggregate amount for exemption irrespective of how many time employee has received leave encashment in his Work tenure.
For example if an employee has optimize INR 2,00,000 from his organization at his resignation then his balance INR 1,00,000 (INR 3 00,000 – INR 2,00,000) is entitled for tax exemption for next organization at next time.
You may refer the below video for leave encashment
Please Note for New Tax Regime Leave Encashment and Gratuity Exemption is allowed for tax Exemption