Blog > Taxability of Leave encashment u/s [sec.10 (10) AA]

Taxability of Leave encashment u/s [sec.10 (10) AA]

by Vikram | 7 January 2014

Every organisation gives its employees a certain number of days which they can utilise to avail as Holidays without any pay cut. These types of Holidays are commonly known as Pleasure Leaves (PL), Casual Leaves (CL), and Sick Leaves (SL) etc…

In order to encourage employees not to take unnecessary holidays or in other words take holidays only when required, the employer gives the option of encashing the balance number of leaves at the end of every year or on Retirement.

Usually an organisation gives up to 30 days as the total of all the leaves mentioned above. 

 

For e.g. ABC Ltd gives its employees 15 PL and 15 SL in a Financial Year. During the year one of its employees takes 12 SL and 5 PL. So at the end of the year the employee will have a balance of 12 Leaves (30-18) to either encash it at the end of the year or carry forward till his retirement.

 

 

Average salary means Basic + DA (forming part of retirement benefit) + Commission (as a fixed percentage on turnover) being last 10 months average salary from the date of retirement.

 

Other Points to be considered for Leave Encashment:

 1)    While calculating completed year of service, ignore any fraction of the year.

 2)    While claiming the statutory amount (i.e. Rs.300000) any deduction claimed earlier as leave encashment shall be reduced from Rs.300000 and the assessee can claim Relief u/s 89(1).

 3)    Leave salary by a legal heir of the Government employee who died in harness is not taxable in the hands of the recipient [Circulars No.309, dated 3/7/1981].

 4)    Leave salary paid to the legal heir of deceased employee is not taxable as salary. The Act is silent on treatment of leave encashment received after death of employee. However, on following grounds, it can be concluded that leave salary received by a legal heir shall not be taxable in the hands of the recipient.

 5)    In case of Non-Government employee, Leave Salary received on Resignation or Retrenchment is taxable. Of course, relief u/s.89 r.w.rule 21A would be admissible. However, Leave Salary received on Voluntary Retirement or Compulsory Retirement is exempt u/s.10 (10AA) (ii) to the extent specified therein. The scope of said section is extended to Leave encashment at the time of retirement whether such retirement is on superannuation or otherwise. 

 

The word “otherwise” covers the case of Voluntary Retirement from service, as held by Madras High Court in CIT vs. R V Shahney        (159 ITR 160).

About the author: Vikram Ramchand is the founder and CEO of Make my Returns. Connect with him via Google+.

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