Leave encashment tax at retirement, worked

When the exemption applies

Leave you cash in while still working is just salary and is taxed in full. The exemption is for leave encashed on retirement or on leaving a job (section 10(10AA) of the old Act, renumbered in the Income-tax Act 2025). It is available in both the old and the new regime.

• Central and state government employees: fully exempt.
• Everyone else: exempt up to the least of four limits.

The four limits

1. The amount actually received.
2. 10 × average monthly salary, averaged over the 10 months before retirement.
3. The cash value of the leave to your credit, where leave is counted at no more than 30 days for each completed year of service, minus leave already taken or encashed.
4. ₹25 lakh, for retirements on or after 1 April 2023 (it was ₹3 lakh before). This is a lifetime limit across employers.

"Salary" here means basic pay plus dearness allowance where it counts for retirement benefits, plus any commission fixed as a percentage of turnover. HRA and other allowances are not included.

A worked case

Retiring after 22 completed years with a private employer:

• Basic + DA at retirement: ₹1,05,000 a month. Average over the last 10 months: ₹1,00,000.
• Leave balance: 240 days, encashed at the last basic + DA. Amount received: 240 × (1,05,000 ÷ 30) = ₹8,40,000.
• Company credits 36 days a year, but the rule counts only 30. Leave taken or encashed during service: 420 days.

The binding limit is the third one, and two things push it below the amount received. The rule values leave at the average salary rather than the last one, and it counts 30 days a year even though this employer credited 36.

Points that change the answer

• Earlier exemptions. If you claimed, say, ₹3 lakh of leave encashment exemption when leaving a previous job, only ₹22 lakh of the cap is left.
• Leave encashed by heirs after an employee's death is not taxable in their hands.
• Encashment during service is fully taxable. If arrears relate to earlier years, Form 10E relief may lower the tax.
• Gratuity is separate, with its own limit. The arithmetic for that is in gratuity by salary and years of service.

Leave encashment, gratuity and provident fund often arrive in the same month. Planning what to do with the lump sum is covered in the first year after retiring.

Reading this

• Salary, leave balance and service are invented for the example; employers' leave rules differ.
• The ₹25 lakh limit applies to non-government employees retiring on or after 1 April 2023.
• This explains the calculation. It is not advice on a particular employer's payout or return.