Know Income Tax Rules On Leave Encashment During Service Or Switching Job
Generally, all employees are eligible to avail certain number of paid leave every year. Paid leaves are part and parcel of incentives offered by employers to join that company. Income tax laws grants exemption for encashment of such paid leaves partly as well as fully. Let us discuss in detail.
Various types of leave and encashment
The leaves to which an employee is eligible for may be of different categories to meet specific needs like sick leave in case the employee gets ill, casual leave to meet emergencies as well as to take care of demands at home and privilege leave to spend time with family members either on holidays or just stay at home. Instead of breaking overall entitlement of leaves in such categories some employers allow a few days of paid leaves as an all consolidated leaves. One cannot carry forward unavailed sick and casual leaves but they are generally allowed to carry forward the privileged leaves.
Even some organisations have an overall cap on the number of days leave one can carry forward and the unavailed carried forward leave lapse in case the number crossed. Out of the carried forward leave certain employers allow you to encash part of your carried forward leave but other do not allow any encashment.
Encashment of leave is allowed during continuance of the employment as well as on leaving the job. An employee may leave an organisation either on reaching the age of superannuation or may resign before reaching the age of mandatory retirement.
Leave encashment at the time of leaving the job
The amount received on leaves encashment by all government employees whether working for central government or a state government are fully exempt in their hands without any monetary limit or restrictions as to the number of days leave encashed. This exemption is available whether the employee leaves the government service on reaching the age of superannuation on resign before age of retirement.
For those who are not working in government departments there are restrictions upto which an employee is entitled to get exemption for leave encashed. For such employees there is an overall limit of ten months leave irrespective of tenure of service leave encashment whereof is exempt. In addition to the restriction as to the number of days there is an overall cap of ₹3 lakh in monetary terms upto which the amount of leave encashment is exempt.
Please note that the restriction is on exemption and not on the right of an employee to get encashment of leave. So in case your employer allows you full encashment of leaves standing to your credit at the time of retirement, you will have to pay tax on the excess amount over which qualifies for exemption. For computing exemption, the salary drawn by an employee during the latest ten months at the time of retirement/resignation is only to be considered.
It may be interesting to note that though employees working in government companies are entitled to full claim exemption for gratuity but no such absolute exemption is available for encashment of leave to them. So people working in various government departments like railways, government hospitals, revenue department etc. are entitled to full exemption for leave encashment but at the same time employees of municipalities, public sector companies like banks, life insurance corporation of India, and other corporation owned by the government are entitled for leave encashment for ten months salary only and that too within the limit of ₹3 lakh.
The above exemption is also subject to one condition that the entitlement to the earned leave for an employee should be restricted to thirty days of leave for each year of services rendered under the same employer. So in case employer allows you privileged leave beyond thirty days for each year of service, the exemption for encashment of accumulated leave at the time of retirement is not available at all. As a matter of practice almost all the employers restrict privileged leave only to thirty days for each years of service.
The amount of exemption for leave encashment available for each employer but is available for your whole tenure of employment under one or more employers. So in case you have already claimed exemption for leave encashment in the past, the amount of exemption available to you would be restricted to ₹3 lakh rupees as reduced by exemption already claimed earlier.
Encashment of leave during continuance of service
Some of the employers do not let their employees accumulate leave beyond a certain number of days but they allow the employees to avail partial encashment of accumulated leave during continuance of their service. As far as tax laws are concerned the exemption in respect of encashment of leave is available only when the cash equivalent of accumulated leave is paid to the employee when he leaves his employment. However, no such tax exemption is available in respect of leave encashed during the continuance of employment with the same employer.
Balwant Jain is a tax and investment expert and can be reached on email@example.com and @jainbalwant on Twitter.