Leave salary = encashment of unused leave standing to an employee's credit. Employees may either encash leave during service or accumulate and encash at retirement.
## Taxability
Stage / Type
Treatment
Leave encashment during job
Fully Taxable
At retirement – Government Employee
Fully Exempt
At retirement – Non-Government Employee
Partially Exempt (formula below)
## Exemption for Non-Government Employees (At Retirement)
Exempt = Lower of:
1. Actual leave encashment received
2. Average Salary p.m. × Leave Credit (in months)
3. Average Salary p.m. × 10 months
4. ₹25,00,000 (lifetime aggregate cap)
Notes:
Salary = Basic + DA(forming part) + CT.
Average = average of preceding 10 months ending on the date of retirement.
Leave Credit is computed as:
Particulars
Days
Leave allowed = 30 days × completed years of service (cap leave entitlement at 30 days p.a. even if employer grants more; ignore fraction of year)
XX
Less: Leave actually taken
(XX)
Leave Credit (convert to months by ÷ 30)
XX
## ₹25,00,000 Lifetime Cap
This is a lifetime ceiling across all employers. Any exemption already availed from a previous employer reduces the limit available now.
Worked example
### Example 1
Example: Mr. X retired on 30-Sep-2024 after 24 yrs 7 m service. Avg. salary p.m. (last 10 m) = ₹50,000. Leave allowed = 45 days/year (cap at 30); leave taken = 100 days. Leave encashed at retirement ₹6,00,000.
Service years (ignore fraction) = 24. Leave allowed = 30 × 24 = 720 days. Less taken = 100 → Credit = 620 days = 20.67 m.
Allowing more than 30 days of leave per year while computing leave allowed – capped at 30 days p.a. regardless of employer's policy.
Counting fraction of a year of service while computing 'leave allowed'.
Treating leave encashment during service as exempt – it is fully taxable.
Forgetting that ₹25,00,000 is a lifetime cap across employers.
Bare-Act text Section 10(10AA) · Income-tax Act, 1961 · click to expand
Section 10(10AA) – (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise; (ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf.