Newest Depart Encashment Tax Exemption Guidelines

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Within the 2023-24 Finances, finance minister Nirmala Sitharaman has elevated the tax exemption restrict on go away encashment, on the retirement of non-government salaried staff to Rs 25 lakh, from Rs 3 lakh. The newest go away encashment exemption restrict is relevant from FY 2023-24 (AY 2024-25).

If you’re a salaried particular person, I’m certain your are conscious of various kinds of LEAVES like informal go away, earned go away, sick go away, private go away and so forth., Typically, it’s possible you’ll not avail all of the leaves which are out there to you and a few of your leaves could stay unused. So, your leaves may also carry you some revenue. 

On this put up, allow us to perceive – What’s Depart Encashment? What are the brand new and newest go away encashment taxation guidelines? Is Depart encashment quantity tax exempted? The best way to calculate Depart encashment tax exemption restrict? What’s the Depart encashment calculation formulation?

What’s Depart Encashment?

Many of the corporations assist you to encash the unused stability of leaves throughout your service or throughout resignation. You might be additionally allowed to encash them on retirement. So, encashing the go away stability is called ‘Depart Encashment’. (Depart encashment is an outlined profit scheme). Depart encashment guidelines fall beneath Part 10 (10AA)(ii) of the Earnings-tax Act.

Many organizations present the power of encashment of go away both;

  • In the course of the interval of employment (or)
  • On the time of retirement (together with separation on account of resignation, retrenchment, VRS and so forth apart from termination) of the worker (or)
  • On the time of Termination of the worker.

Now, the query arises, if this go away wage is taxable or tax-free? Are the Depart encashment taxation guidelines similar for Govt and Personal staff?

Newest Depart Encashment (or) Depart Wage Tax Therapy Guidelines

For tax therapy of go away encashment beneath part 10(10AA) of Earnings Tax Act 1961, the workers have been categorised into two varieties:

  • Govt Staff and
  • Non-Govt staff (PSU or Personal staff)

Let’s notice that if you happen to (Gov/non-govt) obtain go away encashment if you are in service, that quantity turns into totally taxable and types a part of your ‘Earnings from Wage’.

(Click on on the picture to Zoom)
I) Govt Worker & Tax therapy of Depart encashment (LC)
  • In the course of the interval of employment / service, if an worker encashes any leaves, your complete LC quantity is totally taxable.
  • On the time of retirement or separation or resignation, LC is totally exempted from Earnings Tax.
  • On the time of termination of worker, it’s totally taxable.
Depart Encashment quantity acquired Taxable / Tax-Exempt?
Throughout employment / service Absolutely Taxable
On the time of Retirement / Separation / Resignation Absolutely Tax-exempt
On Termination of employment Absolutely Taxable
Depart Encashment Tax therapy guidelines for a Govt worker
II) Non-Govt Worker & Tax therapy of Depart Encashment

Beforehand, non-government staff may obtain a most tax exemption of as much as Rs 3 lakh on go away encashment. This restrict was set in 2002 when the very best primary pay within the authorities was Rs 30,000 per 30 days. This restrict has been elevated to Rs 25 Lakhs w.e.f 1st April, 2023.

The CBDT has just lately launched a contemporary notification (as beneath) on the elevated restrict of go away encashment.

CBDT Notification on latest leave encashment exemption limit 25 lakhs.pdf
CBDT Notification on newest go away encashment exemption restrict Rs25 lakhs
  • Any go away encashed through the interval of employment / service is totally taxable.
  • LC is both totally or partially exempted on the time of retirement or resignation. Tax Exemption on LC availed throughout retirement or resignation is least of the next:
    1. Rs 25,00,000.
    2. Precise Depart encashment quantity that has been acquired by an worker.
    3. 10 months’ Wage.
    4. Money (wage) equal of leaves that’s out there on the time of retirement. Depart calculation is finished topic to most of 30 go away per accomplished yr of service. (Do notice that, least of those is exempted from revenue tax, the remaining LC stability (if any) is taxable)
  • On the time of termination, it’s totally taxable
Depart Encashment quantity acquired Taxable / Tax-Exempt?
Throughout employment / service Absolutely Taxable
On the time of Retirement / Separation / Resignation Tax-Exemption is least of the next;

A. Rs 25 Lakhs (new statutory restrict)

B. Precise go away encashment quantity
acquired by a pvt worker.

C. 10 months Wage (on the premise of common wage
of final 10 months)

D. Money equal of leaves which are mendacity credit score
on worker’s credit score, on the time of retirement

On Termination of employment Absolutely Taxable
Depart Encashment Tax therapy guidelines for Non-Govt of Pvt worker

(Definition of ‘Wage’ for Depart Encashment : Wage = Primary wage + Dearness Allowance + Fee)

The tax therapy and implications of LC are fairly clear concerning a Govt worker.

Nevertheless, concerning LC by a non-govt worker, we have to do some calculations w.r.t ‘money equal of leaves’ (level no 4).

Money equal of go away on the time of retirement or resignation = { ( ( ( Y * C) – A ) / 30) * S }

  • Y’ is No of accomplished Years of service (you must exclude a part of an yr, if any).
  • C’ is complete no of leaves Credited per yr. If firm supplies 40 leaves per yr, for calculation objective we have to take 30 leaves solely.
  • A’ is complete no of leaves Availed through the service (complete no of leaves minus no of leaves that had been encashed).
  • S’ is common wage for final 10 months.
Necessary factors on Depart Encashment & Taxation:
  • Depart credit score is simply on accomplished years of service(If it’s 25 years 6 months, it must be taken as 25 years.)
  • If leaves are credited on the charge of say 55 days go away for every year of service then calculation shall be made on the charge of 30 days go away just for every year of service . If, nonetheless, earned go away is credited on the charge of say 25 days go away for every year of service, calculation shall be made on the charge of 25 days go away for every year of service (w.r.t. above ‘money equal of go away’ calculation).
  • Has the Depart encashment tax Exemption restrict been elevated kind 2023? Sure, Rs. 25 lakh is the utmost tax reduction that an worker can declare in his/her lifetime.
  • In case you have claimed a tax exemption of Rs 20,00,000 throughout a monetary yr on receipt of go away encashment then a most exemption of Rs 5,00,000 can solely be claimed within the future years.
  • If you happen to obtain LC from two or extra employers in the identical yr, then the combination quantity of go away wage exempt from tax can’t exceed Rs 25,00,000.
  • Is Depart Encashment quantity acquired by a authorized inheritor taxable? – Depart encashment acquired by your nominee / authorized inheritor will not be taxable for all sorts of staff.
  • In case of Non-Govt staff, LC acquired on the time of resignation or retirement is both totally or partially (as defined above) exempted from Earnings Tax. For instance – If go away encashment is Rs 25 Lakh (acquired by a pvt worker on resignation) and the precise exemption is say Rs 20 Lakh (as per above calculation) then Rs 5 Lakh is taxable (as per your revenue tax slab charge) and Rs 20 Lakh is exempted.
  • Although the official notification (as above) has been issued on twenty fifth Could, 2023, this shall be deemed to have come into drive w.e.f. 1st April, 2023. So, in case you are retired between 1-Apr-2023 and 24-May2023, the employer would have assumed the tax-free restrict to be Rs 3 lakh. You may revert to the employer and request for the extra quantity of go away encashment if it was due.
  • The place can I discover particulars on my encashed leaves? – You could find Particulars of your Depart Encashment in Remaining settlement doc / Wage Certificates / Type 16.

Proceed studying:

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