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Income Tax Rules - Leave Salary / Leave Encashment and Income Tax Exemption / Taxable Amount Calculator

What is Earned Leave

Normally every employee is entitled to certain no. of leaves per annum. and if this leave is not availed then it will be accumulated subject to certain maximum limit such unutilized either get lapsed or get carry forward which can be enchased later at the time of retirement/otherwise or on leaving the employer, pay equivalent to leave remaining unutilised in the employee account will be paid to employee. (rules varies from organisation to organisation). This type of leave is called Earned Leave (In PSU Banks it is also called as Privilege Leave) and amount received in lieu of this unutilised amount is called leave salary/leave encashment.

The taxation of Leave salary for various categories of employees is shown here under:

  1. Leave Encashment - During Continuity of Employment - By Government / Non-Government Employee

    Leave salary received by any employee during the period of service is fully Taxable. However relief can be claimed under section 89.

  2. Leave Encashment - At the time of Retirement / Leaving job - By Government Eemployee

    Leave salary given to Central / State Government employees at the time of retirement / superannuation in respect of period of earned leave at his credit, it is fully exempt from tax under section 10(10AA)(i).

  3. Leave Encashment - At the time of Retirement / Leaving job to other employee (non Central & State Government employee)

    Leave salary given to Non-Government employee, the PSU banks employee and other PSU sector employees comes under this category and in their cases least of following will be exempted under section 10(10AA)(ii)

    1. Leave Encashment Actually received.
    2. Last 10 Month average salary (average salary explained below)
    3. Maximum amount fixed by the Government from time to time, Presently it is Rs. 300000/- lac (given below)
    4. Period of earned leave (in no. of months) to the credit of the employee at the time of his retirement leaving the job X Average monthly salary.


  1. As per Income Tax rules Earned Leave entitlement for Encashment at the time of retirement / superannuation / leaving job can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired to the Leave Balance

  2. Leave Salary paid to Legal heirs of deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
  3. Leave salary received by family of Government employee who died in harness, is not taxable in hands of the recipient

How to find out Average monthly salary?

'Average Salary' for the aforesaid purpose is to be calculated on the basis of salary drawn during the period of 10 months immediately preceding the date of retirement. Here, salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any).

The PSU Banks and other organisations includes the basic components of the Special Allowance, Fixed Pay and Professional Qualification Allowance which are included in their superannuaton benefits i.e their organisation is deducting PF on these allowances.

Maximum Amount Specified to be exempted From Income Tax

The following table shows the ceiling of amount exempt from Income Tax revised from time to time

Date of retirement/ Superannuation Amount
before 1.1.198225550
1.1.1982 to 30.06.198630000
01.07.1986 to 31.12.198673400
01.01.1987 to 30.06.198775600
01.07.1987 to 31.12.198777760
01.01.1988 to 31.03.199579920
01.04.1995 to 30.06.1995130320
01.07.1995 to 01.07.1997135360
02.07.1997 to 01.04.1998240000
02.04.1998 onwards300000

Leave Salary Encashment - Tax Exemption & Amount Chargeable to Tax calculator
(for Non Govt. Employees)

1Enter Leave Encashment Amount Paid
2Enter Leave Encashment Period (enter period in number of Days) (a month = 30 days)
For the purpose to calculate of exemption of amount of leave encashment enter last 10 months salary
S. No. Month Basic PayDA Spl Pay Fixed Pay Professional Qualification Pay Total
11 Total Salary of 10 months
12 Average salary for the period of leave en-cashed
13Leave Encashment Amount Exempted
14Leave Encashment Amount Taxable