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leave encashment

All You Need To Know About Leave Encashment

Last Update Date : October 05, 2018

leave encashment

Many companies have policies to encourage employees and for their welfare. Leave encashment is one of the privileges given to employees. Let us discuss about leave encashment, the tax computation and exemptions allowed for leave encashment.

What is Leave Encashment?

Many organizations offer medical leaves, casual leaves, gazetted leaves every year to every employee. In case, the employee fails to avail those benefits of leaves, such leaves can be carried forward to the next year. The employee has an option to encash such leaves and earn his salary based on how many days he/she is willing to encash. The policy of encashing their leaves is called leave encashment.

Eligibility

  1. While in Service
    • Earned leaves can be encashed by the employee in the next year, once the leaves have been carried forward to the next year. the quantum of leave to be encashed in each case is not more than 50% of the Earned Leave at credit or 30 days earned leave whichever is less.
    • If an employee is ready to get released on acceptance of his resignation, in such cases encashment is received on the date of release of such employee provided he/she serves his/her notice period, if any.
    • The trainees can encash unveiled leave with full stipend at the time of completion of their training. In calculating the period of Leave with full stipend, all holidays and off-days whether occurring during or end of the period shall be excluded.
  2. On dismissal or removal
    • The leave encashment benefit will not be provided to the employees if they are dismissed or removed from their job. In case of termination, employee will be eligible to earn the encashment of leaves as per rules.
  3. On Retirement
    • In case of retirement of an employee, then he/she can avail encashment on the leaves that are unutilized.
  4. On Retrenchment
    • The employee shall be paid leave salary in lieu of earned leave due to him.
  5. On Death
    • The leave salary in respect of earned leave standing to the credit shall be paid to the nominee declared for receiving the Provident Fund and Gratuity or in the absence of nominee to his legal heir.

Encashment Benefits

  1. Encashment of leave is calculated based on the last withdrawn salary, which includes basic pay, dearness allowance, any medical allowances, personal pay (if any non-practicing doctor allowances) allowance admissible to EDP, and other staff working in Finance & accounts department.
  2. The encashment benefits don’t include wages/salary while working overtime Gratuity, PF, Bonus funds etc.

[ Read: Leave Salary Encashment Exemption ]

Procedure For Leave Encashment

  1. For the employees encashing their leaves while in service, he/she is required to apply in writing to the sanctioning officer.
  2. In all other cases, it shall be settled by the appropriate authority.

Sanctioning Authority

The authorities who are competent to sanction leaves to the employees shall be the sanctioning authority for approving encashment of leave.

Encashment of Half-Pay Leave

Encashment of half-pay leave will be allowed, provided it’s must be his/her superannuation or voluntary retirement. Such encashment will be provided only if the employee serves for 20 years continuously.

Computation/Exemption of Tax on Leave Encashment:

Such encashment amount received by the employees is taxable under the head “Income from Salary.” However, at the time of filing tax returns, there are few exemptions allowed from the amount received as leave encashment.

  1. In case of continuous service of both government and non-government employees, benefit of leave encashment is allowed during the service. Such amount is taxable. However, relief can be taken under section 89.
  2. In case of retirement or resigning the job,
    • For a government employee, the benefit of leave encashment is allowed. Such amount is taxable under the Income Tax Act. It is fully exempt from tax under section 10(10AA) (i).
    • For a non-government employee, leave encashment benefit is allowed. However, it is taxable and the exempt of such taxable amount is either fully or partially exempt depending on the cases under section 10(10AA) (ii).
    • Accumulated leaves encashed by a non-government employee on his/her retirement, the calculation of leaves encashed will be considered at least of the following:
      • Cash equivalent of un availed leave calculated based on maximum 30 days leave for every year of actual service rendered.
      • Amount specified by the Government i.e. Rs. 3,00,000/-.
        10 * Average monthly salary.
      • Actual amount of leave encashment received at the time of retirement

To know how to utilize the tax saving options available to you and for better tax saving and planning options, consult your personal tax expert at H&R Block India

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