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

### Step 1 — When is it received?

During the period of service: Leave encashment is fully taxable for every employee.
On retirement (whether on superannuation or otherwise): exemption rules below apply.

### Step 2 — Who received it (on retirement)?

Government employee → Leave encashment is fully exempt under Section 10(10AA)(i).

Any other (non-Government) employee → Least of the following four is exempt under Section 10(10AA)(ii):

1. ₹25,00,000 (statutory ceiling)

2. Leave salary actually received

3. 10 months × Average Salary

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

### Important limits on the 4th criterion

Earned-leave entitlement cannot exceed 30 days for every completed year of actual service rendered to the employer from whose service the employee retired.

### Meaning of Salary

Salary = Basic + D.A. (to the extent forming part of retirement benefits) + Commission (fixed % of turnover).

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

### Other notes

The ₹25,00,000 exemption is a lifetime ceiling across all employers.
Exemption under Section 10(10AA) is available irrespective of the tax regime.

⚠️ Common exam mistakes

Forgetting that leave encashment received while still in service is fully taxable for all employees.
Capping earned-leave entitlement at more than 30 days per year of service in the cash-equivalent computation.
Computing average salary over a period other than the 10 months preceding the date of retirement.
Applying the ₹25 lakh limit per employer rather than as a lifetime cumulative ceiling.
Treating a non-Government employee's leave encashment as fully exempt like a Government employee's.

Bare-Act text Section 10(10AA) · Income-tax Act, 1961 · click to expand

Leave encashment received during the period of service is fully taxable. On retirement: by a Government employee — fully exempt u/s 10(10AA)(i); by any other employee — least of the following is exempt u/s 10(10AA)(ii): Rs. 25,00,000 / Leave salary actually received / 10 months × Average Salary / Cash equivalent of unavailed leave (based on last 10 months average salary) to his credit at the time of retirement. Earned leave entitlement cannot exceed 30 days for every year of actual service rendered. The exemption is limited to Rs. 25 Lakhs throughout the lifetime of the employee. Exemption under section 10(10AA) is available irrespective of the tax regime.

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