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Leave Encashment Summary
Tax-exempt amount
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Open the ITR Calculator → Gratuity CalculatorWhat is leave encashment?
Leave encashment (also called leave salary or leave en-cashment) is the amount paid by an employer to an employee in exchange for unused earned leave that the employee has accumulated. It is governed primarily by the employer's leave policy and, for exemption purposes, by Section 10(10AA) of the Income Tax Act.
When is leave encashment taxable?
- During service: Fully taxable in the year received — no exemption applies when an employer pays out leave while the employee is still working.
- On retirement / superannuation / VRS / death / resignation: A significant portion can be exempt, as detailed below.
The four limits (private employees)
The exempt portion under Section 10(10AA)(ii) for private-sector employees is the lowest of all four of the following:
- Actual leave encashment received — whatever the employer actually pays.
- 10 months' average salary — average monthly basic + DA over the last 10 months of service × 10.
- Cash equivalent of earned leave at credit — leave balance (in days) × (monthly salary ÷ 26). The 26 represents working days per month; leave entitlement is generally capped at 30 days per year of service for this calculation.
- ₹25,00,000 — the statutory ceiling raised in April 2023 (previously ₹3,00,000).
Anything the employee receives above this exempt figure is added to their taxable income for the year.
What changed in 2023?
With effect from 1 April 2023, the Government of India raised the statutory exemption ceiling for non-government employees from ₹3,00,000 to ₹25,00,000. This was long overdue — the old limit had been unchanged since 2002. For a senior employee retiring with a large accrued leave balance, this change can shield the entire encashment from tax.
Government employees
Employees of the central or state government, or statutory bodies governed by central/state government rules, receive their leave encashment entirely tax-free under Section 10(10AA)(i). There is no limit, and no calculation is needed — the full amount is exempt.
Frequently asked questions
Is leave encashment taxable in India?
Leave encashment received during service is fully taxable. On retirement or separation it is exempt under Section 10(10AA) up to the prescribed limits — fully exempt for government employees, and up to ₹25 lakh for private employees.
What changed about leave encashment exemption in 2023?
The statutory exemption ceiling for non-government employees was raised from ₹3 lakh to ₹25 lakh effective 1 April 2023, significantly reducing the tax burden for retiring private-sector employees.
Is leave encashment exempt on resignation?
Yes. The exemption under Section 10(10AA)(ii) applies on resignation, VRS and termination in addition to retirement. The same four-limb minimum calculation is used in all cases.
How is per-day salary calculated?
Per-day salary = monthly salary ÷ 26 (representing standard working days per month). So leave balance in days × (monthly salary ÷ 26) gives the cash equivalent of leave at credit.
Is my data stored or sent anywhere?
No. All calculations run entirely in your browser — nothing you type is transmitted to or stored on any server.