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Section 3 Retirement Benefits

Section III: Retirement Benefits

Exemption on leave salary

Check with your employer about their leave encashment policy. Some employers allow you to carry forward some amount of leave days and allow you to encash them while others prefer that you finish using them.

Amount received as compensation for leave days accumulated is referred to as leave encashment and it is taxable as salary.

When is leave encashment exempt from tax?

It is fully exempt for Central and State government employees

For non-government employees, the least of the following three is exempt-

  1. 10 months average salary preceeding retirement or resignation
    (where average salary includes basic and DA and excludes perquisites and allowances)
  2. Leave encashment actually received
  3. Amount equal to salary for the leave earned
    (where leave earned should not exceed 30 days for every year of service)
  4. Rs.3,00,000

The amount chargeable to tax shall be the total leave encashment received minus exemption calculated as above. This is added to your income from salary.

Relief under Section 89(1)

You are allowed tax relief under Section 89(1) when you have received a portion of your salary in arrears or in advance, or have received family pension in arrears.

Section III: Retirement Benefits



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