Tax treatment of leave salary in the hands of the employee

Leave Salary is taxable on the following basis:-

1. In the case of an employee of the Central Government or a State Government , any amount received as cash equivalent of leave salary in respect of the period of earned leave at his/her credit at the time of retirement/superannuation is exempt from tax { Sec.10(10AA)(i) },

2. In the case of a Non-government employee leave salary is exempt from tax under section 10(10AA)(ii) to the extent of the least of the following:

• Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise ( earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired ); or
• 10 months “average salary”; or
• The amount not chargeable to tax as specified by the Government, i.e., when date of retirement is after April 2^nd ,1998 then amount is Rs.3,00,000/-; or
• Leave encashment actually received at the time of retirement.

“ Average Salary “ for the aforesaid purpose  is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement /superannuation .

Where the cash equivalent of unutilised earned leave is received by an employee from two or more employers in the same year or different years , the maximum  amount exempt from tax under Sec 10(10AA)(ii) shall not exceed Rs.3,00,000/- as mentioned above.

- Rittique Phukan (CA)