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.
As per the service rules of the company, an employee is eligible for certain number of days of leave. If a leave is unutilized within a year, either the leave may lapse or it may be encashed or it may be accumulated. The accumulated leave standing in his name may be availed by the employee during his service or as per the rules of the company may even be encashed at the time of retirement or leaving the job.
Encashment of leave is calculated based on the last withdrawn salary, which includes basic pay, dearness allowance, any medical allowances, personal pay (if any non-practicing doctor allowances) allowance admissible to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.
The encashment benefits don’t include wages/salary while working overtime Gratuity, PF, Bonus funds etc.
Procedure For Leave Encashment
For the employees encashing their leaves while in service, he/she is required to apply in writing to the sanctioning officer.
In all other cases, it shall be settled by the appropriate authority.
Sanctioning AuthorityThe authorities who are competent to sanction leaves to the employees shall be the sanctioning authority for approving encashment of leave.
Encashment of Half-Pay LeaveEncashment 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.
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.
While in ServiceEarned 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.
On dismissal or removalThe 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.
On RetirementIn case of retirement of an employee, then he/she can avail encashment on the leaves that are unutilized.
On RetrenchmentThe employee shall be paid leave salary in lieu of earned leave due to him.
On DeathThe 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.
Leave Encashment while in Service :
- Fully Taxable for all categories of employees including Government, Public Sector Undertakings and non-government organizations.
Leave Encashment at the time of retirement for Government Employees :
- Fully exempt from tax u/s 10(10AA)(i)
- Applicable to Employees of Central and State government , but doesn’t include employees of Public Sector Undertaking (PSU) Employees
- Retirement includes voluntary retirement
Leave encashment at the time of retirement for Other Employees :
- Partially exempt from tax u/s 10(10AA)(ii)
- Non-Government Employees such as employee’s private companies including PSU employees, local authorities.
- Retirement includes voluntary retirement (VRS) and resignation. So, Leave encashment received on VRS is partially exempt from tax.
- Leave Encashment amount is exempt to the extent of the minimum of the following (a) Leave encashment actually received OR (b)10 months average salary OR (c) Cash equivalent of leave salary for a maximum of 30 days leave per every year of service (fraction of the year to be ignored) OR (d) Amount specified by the Government Rs.3,00,000
- Salary for this purpose includes Basic and Dearness Allowance (DA).
- Average Salary for this purpose means average salary drawn by the employee during the period of 10 months immediately preceding his retirement
In case of death of the employee :
- The amount received by legal heirs is totally exempt from tax.
Earned Leave from different employers :
- If the leave encashment is received from more than one employer, the maximum amount of exemption allowed is Rs.300000. So the maximum amount an employee can claim is Rs.3 Lakh during the lifetime.
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