InvestorQ : Can you explain how leave encashment shall be taxed?
Shobit Khurana made post

Can you explain how leave encashment shall be taxed?

Answer
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Gauravi Patel answered.
1 month ago


Any leave encashment received during the period of service is fully taxable, and relief under section 89(1) can be claimed if it is applicable. However, leave encashment received by the central and state government employees at the time of retirement in respect of the period of earned leave at credit is fully exempt. In the case of other employees, leave encashment shall be taxable to the least of the following:

  1. Leave encashment actually received.
  2. 10 months’ average salary.
  3. Cash equivalent to unutilized earned leave (earned leave entitlement shall not exceed 30 days for every year of actual service).
Leave salary in respect of privilege leave standing to the credit of employee at the time of his death, payable to his legal heir shall not be taxable.