The amount paid for leave or leave salary is known as leave encashment. All leave encashment including encashment of sick leave to an employee is taxable, if he/she is in service.
But leave encashment is received at the time of retirement is fully exempted, if the person received the leave encashment is a government employee. If the person received the leave encashment is not a government employee, the least of the following is exempted from income for the financial year.
Rs. 3,00,000/- or
Last Ten months’ average salary before the retirement, or
Cash equivalent of the leave due at the time of retirement, or
Leave encashment actually received at the time of retirement
The least of the abovementioned items are exempted from salary income for non government employees.
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LEAVE ENCASHMENT AT THE TIME OF RETIREMENT FOR ALL THE MPLOYEES SHOULD BE EXEMPTED FROM PAYMENT OF INCOME TAX SUBJECT MINIMUM OF THE FOLLOWING
A) ACTUAL AMOUNT RECEIVED
B) 10 MONTHS SALARY
C) 10 MONTHS SALARY OF HIGHEST PAID GOVERNMENT EMPLOYEE