Leave encashment limit hiked to Rs 25 lakh: What does it mean for you?

The tax exemption limit for leave encashment upon retirement for non-government salaried employees has been hiked to Rs 25 lakh, the Central Board of Direct Taxes (CBDT) informed on Thursday. Previously, the limit was Rs 3 lakh. 

The relief was announced by Finance Minister Nirmala Sitharaman in the Union Budget 2023 and the proposed hike has come into place since April 1, 2023, a circular from CBDT stated.

In a statement dated May 24, CBDT said, "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. 2500,000 as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise."

According to media reports, CBDT said that the relief applies to the period of earned leave in the credit of employees during the time of retirement whether on superannuation or otherwise.

Under a section in the Income Tax Act dealing with leave encashment of non-government salaried employees shall not exceed the Rs 25 lakh limit, it further said. 

The benefit to private sector employees is subject to conditions listed under section 10 of the Income Tax Act, which deals with incomes exempt from taxation, a media report said.

Meanwhile, as far as government employees are concerned, the entire leave encashment amount is exempted from tax. 

The earlier limit of Rs 3 lakh, was set in 2002, when the highest basic pay was Rs 30,000 per month.

Keeping in line with the government salaries, it was increased to Rs 25 lakh, the Finance Minister proposed during her Budget speech.

This decision by the finance ministry is considered a positive one for all non-government employees as they can now be benefitted from the increased tax exemptions.

What is leave encashment?

According to an NDTV report, It is the amount of money an employee receives in exchange for a period of leaves not availed.

In the organised sector, leaves for employees are usually categorised as sick, earned, and casual. Out of these, sick and casual leaves lapse if not availed, whereas, earned leaves are carried forward. However, the earned leaves also tend to lapse after a certain period of time, depending on the policies of an organisation.

The money earned through leave encashment is also liable to be taxed,