LEAVE SALARY

   

As per Service rules every employee is entitled to certain no. of leaves per annum. If an employee does not utilize all his leaves available to him per annum such unutilized either get lapsed or get carry forward which can be enchased later. If such carry forward leaves are liquidated in cash form during the continuity of employment or on retirement, it is known as leave salary.

The taxation of Leave salary for various categories of employees is shown here under:

Status of Employee

Nature of Leave Encashment

Taxability

Government/ Non-Government employee

Leave encashment during Continuity of employment

It is chargeable to tax. However relief can be taken under section 89

Government employee

Leave encashment at the time of retirement / leaving job

It is fully exempt from tax under section 10(10AA)(i)

Non-Government employee

Leave encashment at the time of retirement / leaving job

It is fully or partially exempt from tax in some cases under section 10(10AA)(ii)

In Simple words from the above tabloid summary we can conclude that Leave Salary is chargeable to tax only in two cases first accumulated leave being enchased by any class of employee- Govt. or Non Govt. during the continuation of employment whereof it is fully chargeable to tax.

Second being accumulated leaves enchased by a non govt. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary comes into picture which can be calculated as LEAST of the following:

1.

Period of earned leave (in no. of months) to the credit of the employee at the time of his retirement leaving the job ×Average monthly salary.

2.

10 × Average monthly salary.

3.

The amount specified by the Government  i.e., Rs. 3,00,000 /-;

4.

Leave encashment actually received at the time of retirement.

How to find out leave standing to the credit of an employee at the time of retirement or leaving the job THREE STEPS THEORY

Step (a) – Find out duration of services in number of years (ignore any fraction of year).

Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).

For instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service. 

Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:-

Step (a) × Step (b) minus Step (c) ÷ 30

How to find out Average monthly salary?

Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.

STILL CONFUSED; NOT BEEN ABLE TO CALCULATE YOUR EXEMPTED SALARY ???

TRY OUR LEAVE SALARY EXEMPTION CALCULATOR 

(Just Click On Link Below)

Leave Encashment Calculator