Leave Encashment Tax —
Rs 25 Lakh Exempt on Retirement
When leave encashment is taxable, the full Section 10(10AA) exemption for government and private employees, the Rs 25 lakh lifetime cap, the least-of-three calculation and how both tax regimes treat it.
Leave encashment received during employment is fully taxable as salary at your slab rate. At retirement, resignation or superannuation: a government employee is 100% exempt under Section 10(10AA)(i). A non-government (private/PSU) employee is exempt up to the least of three limits — actual amount, 10 months' average salary, or Rs 25,00,000 (the lifetime cap raised in Budget 2023 from Rs 3 lakh). Leave encashment paid on an employee's death is fully exempt. The exemption is a salary exemption, so it applies in both the old and new regimes.
The Rs 25,00,000 limit under Section 10(10AA) is cumulative across your entire career, not per employer. If you claimed a leave-encashment exemption at an earlier job, only the unused balance is available now. Government employees are not bound by this cap — their retirement leave encashment is fully exempt.
Leave Encashment Tax Treatment — All Cases
Whether leave encashment (also called leave salary) is taxed depends on when you receive it and who your employer is. The table covers each common case and the section that applies.
| Scenario | Employee type | Tax treatment | Regime |
|---|---|---|---|
| Encashment during service | All employees | Fully taxable as salary | Both |
| At retirement / superannuation | Central / State Government | Fully exempt u/s 10(10AA)(i) | Both |
| At retirement / resignation | Non-government (private / PSU) | Exempt to Rs 25L (least of 3); excess taxable | Both |
| On death of employee | All employees | Fully exempt — paid to legal heir | Both |
Section 10(10AA), Income-tax Act 1961. Rs 25 lakh cap set by CBDT Notification 31/2023 (eff. FY 2023-24).
How to Calculate the Exemption (Non-Government)
For a private-sector employee, the exempt leave encashment at retirement is the lowest of these three amounts. The taxable portion is whatever is left over, added under "Income from Salaries".
| # | Limit | Amount |
|---|---|---|
| 1 | Actual leave encashment received | As paid by employer |
| 2 | 10 months × average salary of last 10 months | Salary = Basic + DA + commission (fixed % of turnover) |
| 3 | Statutory lifetime cap | Rs 25,00,000 (less any exemption already claimed) |
A fourth implicit limit — cash equivalent of leave (max 30 days per completed year of service) — also caps the eligible amount.
Worked example. You retire from a private company with Rs 8,00,000 leave encashment. Your average salary (Basic + DA) over the last 10 months is Rs 60,000/month, so 10 × Rs 60,000 = Rs 6,00,000. The lifetime cap of Rs 25 lakh is unused. The exempt amount is the least of the three.
Exempt portion
Taxable portion
If you encash earned/privilege leave under a mid-career leave-encashment scheme without leaving the job, the whole amount is taxable salary at your slab rate — Section 10(10AA) exemption applies only on retirement, superannuation, resignation or death. You may claim relief under Section 89(1) if it bunches income into one year.
Retiring this year with a large leave-salary payout? Get the exempt vs taxable split right.
Talk to a Tax Expert →Leave Encashment in the Old vs New Regime
Unlike Chapter VI-A deductions such as Section 80C, the leave-encashment exemption is a salary exemption under Section 10. It is not withdrawn in the default new regime — you keep it either way.
Old regime
- Full 10(10AA) exemption (Rs 25L / 100% govt)
- Standard deduction Rs 50,000 (salaried)
- 80C, 80D, HRA, LTA also available
- Best when total deductions are high
New regime (default)
- Same 10(10AA) exemption applies fully
- Standard deduction Rs 75,000 (salaried)
- Most other exemptions/deductions lost
- 87A rebate up to Rs 12L taxable income
Leave encashment usually arrives alongside other retirement payouts. Each has its own exemption ceiling — do not confuse them:
| Retirement payout | Section | Exemption cap (non-govt) |
|---|---|---|
| Leave encashment | 10(10AA) | Rs 25,00,000 |
| Gratuity | 10(10) | Rs 20,00,000 |
| Retrenchment compensation | 10(10B) | Rs 5,00,000 |
| Commuted pension | 10(10A) | 1/3 (with gratuity) or 1/2 of pension |
Caps are lifetime/aggregate limits. Government employees are fully exempt on gratuity, leave encashment and commuted pension.
Not sure which regime saves you more on your final salary?
Compare with our calculator →How to Report Leave Encashment in Your ITR
- Form 16 from the employer
- Full & final settlement / retirement letter
- Leave balance and per-day salary computation
- Average salary (last 10 months) working
- Record of any earlier exemption claimed
- Section 89(1) relief working (if in-service encashment)
- Old vs new regime comparison
- AIS / Form 26AS reconciliation
Only Central and State Government employees get the unlimited exemption. Employees of PSUs, banks, universities and autonomous bodies are treated as non-government and are bound by the Rs 25 lakh cap — even though the employer is government-owned. Confirm your category before assuming full exemption.
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Get ITR Filing Help →Leave Encashment Tax — Frequently Asked Questions
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