Leave Encashment Tax
Work out exactly how much of your leave encashment is tax-free — and how much is taxable — under Section 10(10AA) of the Income Tax Act.
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Exemption breakdown — Section 10(10AA)
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Disclaimer: Indicative estimate under Section 10(10AA) of the Income Tax Act, 1961. Actual exemption may vary with employer records, leave rules and prior exemptions claimed. The ₹25,00,000 cap is a lifetime aggregate for non-government employees.
Leave encashment tax — the essentials
When you retire or leave a job, unused paid leave can be encashed. For government employees this amount is fully exempt from tax. For non-government (private) employees, Section 10(10AA) exempts only the least of four limits — the rest is taxable as salary income.
The four exemption limits — least prevails
For a non-government employee, the exempt amount is the lowest of these four figures. Enter your numbers above to see which limit binds your case.
Actual amount received
The total leave encashment your employer actually paid you on retirement or resignation.
Statutory cap — ₹25,00,000
A hard ceiling on the exemption for non-government employees, raised from ₹3 lakh to ₹25 lakh in 2023. It is a lifetime aggregate across employers.
10 months average salary
10 × average monthly salary, where salary is Basic + DA averaged over the last 10 months before leaving.
Cash value of unavailed leave
Leave balance in months (capped at 30 days per completed year) × average monthly salary — the notional value of your unused leave.
Worked example — non-government
Received ₹5,00,000, average monthly salary ₹50,000, 20 completed years, leave balance 300 days. The four limits work out as follows:
₹5,00,000
Actual amount received.
₹25,00,000
Statutory cap.
₹5,00,000
10 × ₹50,000.
₹5,00,000
Leave capped at 30 × 20 = 600 days; balance 300 days = 10 months × ₹50,000.
Exempt ₹5,00,000 · Taxable ₹0
The least of the four limits is ₹5,00,000, which equals the amount received — so the entire encashment is tax-free.
Key terms explained
Salary for this section
Only Basic pay plus Dearness Allowance (to the extent it forms part of retirement benefits), averaged over the last 10 months before you leave. HRA and other allowances are excluded.
Completed years of service
Only full years count — a fraction of a year is ignored. This drives the 30-days-per-year cap used in Limit D.
The ₹25 lakh cap
Before 2023 the cap was just ₹3 lakh. The Budget 2023 raised it to ₹25 lakh, a lifetime aggregate across all non-government employers.
Taxable portion
Any encashment above the exempt figure is added to your salary income and taxed at your applicable slab rate in the year of receipt.
Questions people ask
Short answers on Leave Encashment Tax. Tap a question to open it.
01Is leave encashment taxable?
Leave encashed while still in service is fully taxable as salary. Leave encashed on retirement or resignation is exempt for a government employee, and for other employees exempt up to a limit under section 10(10AA).
02What is the exemption limit for a non-government employee?
The least of: ₹25 lakh (the notified limit), the actual amount received, ten months' average salary, or the cash equivalent of leave at credit calculated at 30 days per completed year of service. The ₹25 lakh is a lifetime limit across employers.
03What counts as salary for this calculation?
Basic salary plus dearness allowance to the extent it forms part of retirement benefits, plus commission based on a fixed percentage of turnover. The average is taken over the ten months immediately preceding retirement.
04Is leave encashment exempt under the new regime?
Yes. Section 10(10AA) is a salary exemption, not a Chapter VI-A deduction, and it continues to apply under the new tax regime.
05Does the exemption apply if I resign rather than retire?
Yes. Section 10(10AA)(ii) covers encashment at the time of retirement "whether on superannuation or otherwise", which includes resignation.
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Disclaimer: This tool gives indicative results for general guidance only and is not professional advice. Please verify with a qualified CA before acting on the numbers.