Leave Encashment Tax — Exemption, Rules & Calculation

Updated: 3 June 2026

Leave encashment received during employment is fully taxable as salary. At retirement or death: Government employees get full exemption. Non-government employees get exemption up to the lowest of — (a) actual amount received, (b) 10 months' average salary (last 10 months), or (c) ₹25 lakh (lifetime limit, enhanced in Budget 2023 from ₹3 lakh). Leave encashment exemption under Section 10(10AA) is available in both old and new tax regimes.

₹25 lakh Leave encashment exemption limit at retirement for non-government employees — Budget 2023 (effective FY 2023-24)

Leave Encashment Tax Treatment — All Scenarios

Scenario	Employee Type	Tax Treatment	Regime
Leave encashment during service	All employees	Fully taxable as salary	Both
Leave encashment at retirement / superannuation	Central / State Government	Fully exempt [Sec 10(10AA)(i)]	Both
Leave encashment at retirement / resignation	Non-government (private / PSU)	Exempt up to ₹25 lakh (least of 3 limits); excess taxable	Both
Leave encashment on death of employee	All employees	Fully exempt — paid to legal heir	Both

How to Calculate Leave Encashment Exemption (Non-Government)

The exempt amount is the minimum of the following three values:

Limit	Description
Limit 1	Actual leave encashment received from employer
Limit 2	Average salary of last 10 months × 10 months (average salary = Basic + DA + commission as % of fixed turnover)
Limit 3	₹25,00,000 (lifetime cumulative cap; reduced by exemption claimed with previous employers)

Example: You retire with ₹8 lakh leave encashment. Average salary (last 10 months) = ₹60,000/month, so 10-month average = ₹6 lakh. Lifetime limit = ₹25 lakh (not previously used). Exempt = minimum(₹8L, ₹6L, ₹25L) = ₹6 lakh. Taxable = ₹2 lakh.

Frequently Asked Questions

Is leave encashment taxable in India?

It depends on when you receive it. Leave encashment received during employment (not at retirement) is fully taxable as salary income. Leave encashment received at retirement or death is fully exempt for government employees. For non-government employees, leave encashment at retirement is exempt up to the least of: (a) actual amount received, (b) 10 months' average salary of last 10 months, or (c) ₹25 lakh. The excess is taxable.

How is the leave encashment exemption calculated for private employees?

For non-government employees, the exempt amount is the lowest of three figures: (1) Actual leave encashment received; (2) Average salary of the last 10 months × 10 months (average salary = basic + DA + commission based on fixed % of turnover); (3) ₹25 lakh (the overall lifetime limit set in Budget 2023). The balance above the exempt amount is added to taxable income under "Income from Salaries."

What is the ₹25 lakh limit for leave encashment?

The ₹25 lakh limit (enhanced from ₹3 lakh in Budget 2023, effective FY 2023-24) is the maximum lifetime exemption available to a non-government employee for leave encashment received at retirement or resignation. This is a cumulative limit across all employers during your entire career — if you claimed exemption in a previous job, the remaining balance is available for the current employer.

Is leave encashment during employment (not retirement) taxable?

Yes, fully taxable. Leave encashment received while still in service — for example, during an employer's "leave encashment scheme" or when you encash privilege/earned leave without quitting — is treated as regular salary and taxed at your applicable income tax slab rate. There is no exemption for leave encashment received during the course of employment.

Is leave encashment exemption available under the new tax regime?

Yes. Unlike most Chapter VI-A deductions, the leave encashment exemption under Section 10(10AA) is a salary exemption, not a deduction. It is available under BOTH the old and new tax regimes. Government employees get full exemption in both regimes; non-government employees can claim exemption up to ₹25 lakh at retirement under both regimes.

Leave Encashment Tax Near You

Expert CA/CS assistance for leave encashment tax across India. Click your city for local details.

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