Types of Leaves and Carryover Policies
Salaried employees are typically entitled to various types of leaves, such as sick leave, casual leave, annual leave, or earned leave. Many employers allow the carryover of unused leave days to the next year, subject to specific rules and policies set by the organization.
Leave Encashment Overview
Leave encashment involves converting accumulated or unused leave days into monetary compensation. This can occur during employment, retirement, resignation, or as per the organization's policies. Private organizations may have different rules regarding leave encashment, with some reimbursing employees annually and others allowing leave to be carried over.
Recent Government Policy Changes
The Budget Speech of 2023 introduced changes in the tax exemption limit on leave encashment for non-government salaried employees. As of April 1, 2023, the Central Government has increased the limit to Rs. 25 lakhs. This limit applies even if an employee receives leave encashment from multiple employers in the same year however aggregate amount of exemption cannot exceed Rs. 25 lakhs.
Taxation of Leave Encashment
- Leave Encashment during Employment:
When employees receive leave encashment while still employed, the amount is fully taxable u/s 17 (1) (va) as part of their 'Income from Salary.' However, tax relief can be claimed under Section 89 of the Income Tax Act. Form 10E must be filled out and submitted online on the income tax portal for this purpose.
- Leave Encashment at the Time of Retirement:
Leave encashment received at the time of retirement differs in taxation based on the employer.
Central and State Government Employees: Fully exempt from tax.
Non-Government Employees: Partially exempt and partially taxable, following the calculation specified in Section 10(10AA).
- Leave Encashment for Legal Heirs:
When the legal heirs of a deceased employee receive leave encashment, the entire amount is fully tax-exempt in their hands.
Tax exemption calculation for leave encashment U/s 10(10AA) for Non-Government Employees:
