## Leave Salary / Leave Encashment — Section 10(10AA)

### Leave encashment DURING service

Fully taxable for every employee (government and non-government).

### Leave encashment ON retirement (superannuation or otherwise)

Government employee → Fully exempt u/s 10(10AA)(i).

Any other (non-government) employee → least of the following is exempt u/s 10(10AA)(ii):

1. ₹25,00,000

2. Leave salary actually received

3. 10 months × Average Salary

4. Cash equivalent of unavailed leave (based on last 10 months' average salary) to credit at retirement

Earned-leave entitlement is capped at 30 days for every completed year of actual service rendered with that employer.

> Salary = Basic + D.A. (forming part of retirement benefits) + Commission (% of turnover)

> Average salary = average of the 10 months immediately preceding the date of retirement.

### Key limits

The ₹25 lakh exemption is a lifetime ceiling — applies even where leave salary is received from two or more employers.
Exemption u/s 10(10AA) is available irrespective of the tax regime.

(The 4th criterion — cash equivalent of unavailed leave — is best learnt as a formula; refer class/marathon for the step-by-step computation of unavailed leave days.)

Worked example

### Example 1

Non-government employee. Service = 24 years; leave entitlement allowed by employer = 40 days/year, but statute caps it at 30 days/year. Leave availed = 200 days. Salary (avg of last 10 months) = ₹50,000 p.m. (₹1,667/day approx). Max leave creditable = 30 × 24 = 720 days; less availed 200 = 520 days unavailed. Cash equivalent = 520 days × (50,000/30). Exemption = least of: ₹25,00,000 / actual received / (10 × 50,000 = ₹5,00,000) / cash equivalent of 520 days.

⚠️ Common exam mistakes

Treating leave encashment during service as exempt — it is fully taxable; only encashment on retirement is eligible.
Using the employer's higher leave entitlement instead of the statutory cap of 30 days per completed year of service.
Forgetting the '10 months × average salary' ceiling, which often turns out to be the limiting (least) figure.
Granting a fresh ₹25 lakh limit per employer — it is a single lifetime ceiling.

Reference: Section 10(10AA)(i) and 10(10AA)(ii) — Income-tax Act, 1961

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Leave Salary / Leave Encashment [Section 10(10AA)]

Worked example

⚠️ Common exam mistakes