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Friday, September 22, 2023

Higher tax exemption on leave encashment for non-govt employees

The Finance Ministry has increased the tax exemption limit on leave encashment for non-government employees from Rs 3 lakh to Rs 5.5 lakh. This will benefit those who have accumulated leave and want to encash it at the time of retirement or resignation.

Leave encashment is the amount paid by the employer to the employee for the unused leaves during the service period. It is taxable under the head ‘salary’ in the income tax return. However, there are some exemptions available for both government and non-government employees.

According to Section 10(10AA) of the Income Tax Act, government employees are fully exempt from tax on leave encashment. Non-government employees are eligible for a lower exemption, which is the least of the following:

  • Actual amount received
  • 10 months average salary
  • Cash equivalent of unutilised earned leave (maximum 30 days for every year of service)
  • Rs 3 lakh (now increased to Rs 5.5 lakh)

The Finance Ministry has notified the new exemption limit of Rs 5.5 lakh through a gazette notification dated May 25, 2023. The notification states that the amendment will come into force from April 1, 2024 and will apply to the assessment year 2024-25 and subsequent years.


The increase in the exemption limit will provide relief to non-government employees who have a large number of accumulated leaves and want to encash them at the time of retirement or resignation. It will also reduce their tax liability and increase their post-tax income.

However, it is important to note that the exemption is available only once in a lifetime. Therefore, non-government employees should plan their leave encashment carefully and optimally.

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