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Taxability of Leave Salary
The accumulated leaves standing to the credit of an employee may be availed by the employee during his service time or, subject to service rules, such leaves may be encashed at the time of retirement or leaving the job.
Encashment of leave by surrendering leave standing to one's credit is known as “leave salary”
If Leave salary encashment is received by any employee while in employment then it is fully taxable in the hands of employee.
While if leave encashment is received in case of retirement or superannuation or resignation, then exemption is available up to the following limits.
For the purpose of discussing the tax treatment of leave salary, we shall have two types of employees; Government and non-government employees. Based on the status of the employee, the tax treatment of the leave encashment differs.
In case of Government Employee
Any leave salary received by an employee of Central Government, State Government is wholly exempt from tax. This exemption is not available to employees of Statutory Corporation & employee of local authority.
In case of Non-Govt. Employee
Least of the following is exempt:-
. Actual amount received
. 10 months average salary
. Average salary x leaves at the credit of an employee (leaves cannot exceed 30 days for every completed year of service, fraction of a year is to be ignored).
. Salary includes basic pay, dearness allowance(if it forms part of the retirement benefits) and percentage wise fixed commission on turnover
. Average Salary = Average of salary drawn in the last 10 months immediately preceding the date of retirement.
Other point releated to Taxation
If leave encashment is received by an employee from more than one employer in the same previous year or in different previous years the aggregate maximum amount exempt from tax on account of leave encashment cannot exceed Rs. 3,00,000.
Leave salary paid to the legal heirs of the assessee, who dies during the employment will not be taxable.
Taxability & Exemption from Employer Point of View
Section 43B disallows the sum which are not paid in the financial year as well as not paid before due date of filing income tax return.
The following sum are allowed in the year in which they are incurred, only if they are paid before the due date of furnishing the return of income under section 139(1) of that year.
As an employer in lieu of any leave at the credit of his employee (Leave Encashment).
i.e. If employer does not paid the statutory dues of leave salary before the due date of filling of return the same will be taxable in the hands of employer as income.