Leave Encashment Windfall
₹25 lakh tax-free leave encashment at retirement
What is This Hack?
Non-government employees get ₹25 lakh (increased from ₹3 lakh) tax-free leave encashment at retirement from FY 2024-25
How It Works
When you retire or resign from a private sector job, employers often pay out your accumulated leave balance as "leave encashment". This is fully taxable income UNLESS you're retiring (not resignation). Budget 2023 dramatically increased the tax exemption limit for private sector employees from a meager ₹3 lakh to a generous ₹25 lakh (government employees already had unlimited exemption). This means the first ₹25 lakh of leave encashment received at retirement is completely tax-free. The formula considers: least of (a) ₹25 lakh, (b) actual leave encashment received, (c) 10 months average salary, (d) leave balance × average salary. This is a HUGE windfall for senior employees with long tenures who accumulate significant leave balances.
Step-by-Step Implementation
Understand Eligibility
Exemption applies ONLY at retirement (superannuation), not resignation or termination. Must be employed in private sector (non-government). Government employees have unlimited exemption.
Accumulate Leave Balance
Throughout your career, try to accumulate earned leave (EL) / privilege leave (PL). Many companies allow carry-forward of 30-45 days annually, building up 200-300 days over 20+ years.
Calculate Average Salary
At retirement, calculate your average salary of last 10 months preceding retirement. Include: Basic salary + DA + Commission (if any). Exclude: HRA, allowances, bonus.
Compute Exemption
Use our Leave Encashment Calculator. Formula: Minimum of (1) ₹25L, (2) Actual payment, (3) 10 months average salary, (4) Leave days × (average monthly salary / 30). The calculator will show tax-free portion.
Request Form 16 Separately
Ask employer to show leave encashment separately in Form 16, not clubbed with last salary. This ensures correct exemption calculation and easier ITR filing.
File ITR Claiming Exemption
In ITR-1 or ITR-2, report full leave encashment amount under "Salary Income". Then claim exemption under Section 10(10AA) showing ₹25L (or lower calculated amount). Net taxable: Excess over exemption limit only.
Real Example: Senior Manager Retiring After 25 Years
Situation
Rajesh retires at age 60 after 25 years in TCS. He accumulated 240 days of leave. Average last 10 months salary: ₹2.5 lakh/month. Leave encashment: 240 days × (₹2.5L/30) = ₹20 lakh paid by company.
Without This Hack
Old limit (₹3L exemption): Taxable leave encashment = ₹20L - ₹3L = ₹17L. Tax @ 30% = ₹5.1 lakhs. Net receipt: ₹14.9L (₹20L - ₹5.1L).
With This Hack
New limit (₹25L exemption): Full ₹20 lakh leave encashment is tax-free (within ₹25L limit). Taxable: ZERO. Net receipt: ₹20 lakhs.
💰 ₹5.1 lakhs tax saved on retirement benefits
Common Pitfalls to Avoid
- Exemption applies ONLY at retirement - resignation/termination doesn't qualify
- Formula has 4 limits - final exemption is MINIMUM of all 4, not ₹25L always
- Average salary calculation specific to last 10 months, not last drawn salary
- Only basic salary + DA + commission count - no HRA, allowances, perks
- If company policy limits leave days eligible for encashment, that becomes a cap
- Any amount above ₹25L limit is fully taxable as salary income at marginal rate
Prerequisites & Requirements
- Employed in private sector (non-government organization)
- Retiring at superannuation (not resigning)
- Accumulated earned leave / privilege leave balance
- Company policy allowing leave encashment at retirement
- Form 16 showing leave encashment separately
- Applicable from FY 2023-24 onwards (AY 2024-25)
Key Benefits
- Potential savings: ₹6.5 lakhs tax saved
- Implementation time: At retirement
- Legal status: fully legal
- Risk level: low
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