Leave Encashment Tax Calculator (Section 10(10AA))
Unused earned leave is usually paid out in cash when you retire or resign. For government employees the amount is fully exempt; for everyone else it is exempt up to a limit that depends on salary, length of service and the leave actually left unused. Since 1 April 2023 the overall ceiling is ₹25,00,000 (previously ₹3,00,000). This calculator applies the four-limb test and tells you how much of your encashment is taxable.
Exemption for non-government employees — least of
- (a) Leave encashment actually received
- (b) ₹25,00,000 (aggregate lifetime limit, reduced by exemption already claimed from earlier employers)
- (c) 10 months' average salary
- (d) Cash equivalent of leave at credit, computed at a maximum of 30 days of leave per completed year of service
"Salary" means Basic + DA (if it counts for retirement benefits) + commission at a fixed percentage of turnover, averaged over the ten months immediately before retirement.
Worked example
Average monthly salary ₹60,000; 20 completed years; entitlement 30 days per year; 300 days of leave already availed; encashment received ₹6,00,000.
- (a) Received = ₹6,00,000
- (b) Limit = ₹25,00,000
- (c) 10 months' salary = ₹6,00,000
- (d) Unused leave = 30 × 20 − 300 = 300 days = 10 months → 10 × 60,000 = ₹6,00,000
Exempt = ₹6,00,000; taxable = nil. If the employer's policy allowed 45 days a year, only 30 days per year would count for the exemption even though the actual payout was higher.
Other situations
- Encashment during service is fully taxable as salary for everyone; relief u/s 89 can be claimed.
- Central and State Government employees are fully exempt on retirement. Employees of PSUs, banks and statutory bodies are treated as non-government.
- Legal heirs receiving encashment on the employee's death are not taxed on it.
The exemption is available under both regimes and must be reported in the salary schedule of the ITR under exempt allowances.
Frequently Asked Questions
What is the leave encashment exemption limit now?
₹25,00,000 for non-government employees retiring or resigning on or after 1 April 2023 (Notification 31/2023). It is an aggregate limit across all employers in your lifetime.
Is leave encashment taxable if taken while still employed?
Yes, leave encashed during service is fully taxable as salary for both government and private employees. Relief under section 89 may reduce the impact.
Why is unused leave limited to 30 days per year?
Section 10(10AA) caps the leave counted for exemption at 30 days for every completed year of service, regardless of the employer's actual leave policy.
Does the exemption apply in the new tax regime?
Yes. Exemptions u/s 10(10AA) for leave encashment, 10(10) for gratuity and 10(10C) for VRS are available in both the old and new regimes.
Disclaimer: This tool is for general information and estimation only. Tax rates and rules change — verify with official sources or a professional before acting. Read full disclaimer.