Finance Ministry increases Tax Exemption Limit for Earned Leave Encashment u/s 10(10AA) of Income Tax Act [Read Notification]

The Central Board of Direct Taxes (CBDT) has notified the enhanced limit for earned leave encashment, to the extent exempted from income tax. This move is in line with the budget proposal for the fiscal year 2023-24.

During the budget announcement, the Union Finance Minister Nirmala Sitharaman had highlighted that the existing limit of ₹3 lakh for tax exemption on leave encashment for non-government salaried employees upon retirement was set in 2002, when the highest basic pay in the government sector was ₹30,000 per month. To account for the increase in government salaries, she proposed raising the limit to ₹25 lakh.

The Gazette Notification from the CBDT of Finance Ministry stated, “In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of Section 10 of the Income Tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs. 25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise”.

It was also clarified that, “This notification shall be deemed to have come into force with effect from the 1st day of April, 2023.”

This means that individuals retiring on or after April 1, 2023, will benefit from the new limit. The Ministry has also clarified that no one will be adversely affected by the retrospective application of this notification.

According to labor laws, every salaried individual is entitled to a minimum number of paid leave days each year. However, it is not mandatory for employees to utilize all their entitled leave days within a given year. Many employers allow their employees to carry forward unused paid leave days.

As a result, when an employee retires or resigns from the company, they often have an accumulated balance of unutilized leave. In such cases, employers are obligated to compensate employees for their unused paid leave, a process commonly known as leave encashment.

The Finance Ministry's decision to increase the limit for tax-exempt earned leave encashment provides relief to retiring employees and ensures that they receive fair compensation for their unutilized leave. This update aligns with the government's efforts to adjust income tax regulations to reflect current economic conditions and salary structures.

To Read the full text of the Order CLICK HERE

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