2. LEAVE ENCASHMENT
Employee’s defined benefit.
Employees are entitled to various types of leave while
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they are in service.
Under this benefit,employee gets cash payments for
unavailing the allowed leaves in each year that he has
accumulated.
The cash value of those leave will be deducted from
the paymentswhich have been already availed by the
employee.
Hence the cash payment availed by the employee in
return of the unavailed leave is known as
leave encashment.
3. Objective of leave encashment
It encourages employees to avail the leave on
planned & systematic basis.
For employer it favours that his work is done dy
his employees in a smooth manner.
For employees ,if they don’t avail their leave then
they are rewarded in the form of leave
encashment.
But in case,when employees avail the leave
within the limit of leave allowed to them by their
employer,atleast they don’t get deduction from
their basic salary.
4. Types of leaves
For emergency purposes.
No accumulation.
Casual leave Have to avail within the year
only.
For sickness.
Accumulation allowed as
Medical leave per service rules.
For general purposes.
Carry forward is allowed.
Privileged leave Non-statutory benefit to
employee on exit from
service.
5. Employees are classified in to two
categories.
2.Non-Government
1. Government employees. employee.
Leave encashment during the Leave encashment during the
service is always taxable. service is always taxable.
Encashment of accumulated Encashment of accumulated
leave at the time of leave at the time of retirement
retirement is fully exempt. is exempt up to some extent .
The govt.employees are not The non-govt. employees are
allowed to accumulate leave allowed to accumulate leave
for more than 10 months. per the norms of employer.
6. LEAVE ENCASHMENT
The unavailed leave has to be calculated on the basis of max
30 days leave for every completed year of services.
But if employer has provided leave,which is less than 3o
days in a p.y ,then this calculation shall be based on such
no.of leaves.
If any employee retires from more than 1 employer then
the exemption for each employer shall be calculated
separately but the total exemption shall not exceed
Rs.3,00,000 .
Leave salary received by the family members after death
of the employees is fully exempt from tax.
7. LEAVE ENCASHMENT
10 months last drawn salary of just preceding the date of
retirement is considered as the average salary.
Salary considersd in the calculation of unvailed leave is
=B.S+COMISSION(fixed %)+D.A*
Government employees mean employees of central govt or
state govt.
For non govt.employees, least of below 4 values shall be
exempt of tax from the accumulated leave encashment.
i)actual amount received.
ii)Rs.3,00,000
iii)10 x avg salary
iv) avg salary x unavailed leave/30.
Leave salary paid to legal heirs of a deceased employee is
not liable to tax.
8. Several case study
1. Rohit’s employer has credited him the leave of 40 days per
year………..then also the maximum permissible unavailed
leave under the IT act,1967 for the 26 yrs of service is
_________=26 x 30 = 780.
2. If in case, 25 days are credited to rohit being a non govt
employee ……..then the permissible unavailed leave will be
_______= 26 x 25 = 650.(as less than 30 days is considered).
3. Mr.j is an govt employee & got Rs. 50,000 as leave
encashment at the time of retirement.
then______complete amount will be exempt as Mr.j is an
govt employee.
4. Mr.j gets the same amount as leave encashment during his
continue service then_____his income will be added in the
gross total income & will be taxed according to the slab rate
in which he falls in to.
9. Case study
3.Mr.x ,non govt employee retired after serving for 16 years & 7
months to the firm.at retirement he received a sum of Rs.50,000
as leave encashment for unavailed leave of 300 days.he was
entitled for 40 days leave per year. Basis salary is Rs.4800 p.m.
compute leave encashment exempt from tax?
least of the following is tax exempt:
1. 50,000 (actual amount received)
2. 3,00,000 (maximum amount exempted)
3. 10 x 4800 = 48000 (10 x 10 months average salary)
4. 4800 x 140/30 =22400 (avg salary x unavailed leave /30)
How to compute un-availed leave?
10. How to compute unavailed leave?
Calculation of company Tax law
unavailed leave:
Leave allowed 40 days per year 30 days per year
Completed years 16 years 16 years
Total leave allowed 16 x 40 =640 days during 16 x 30 =480 days during
the whole service. the whole service.
Unavailed leave 300 (given)
Availed leave 640—300 = 340 340
Unavailed leave 300 (given) 480—340 = 140
