Most of us have a laid back attitude when it comes to painting a picture about ourselves. It is also a fact that those who do their work faithfully get cash in return for their holidays. Surviving leave can be encrypted when the service is on or when you retire or after you resign. However, very little is said about the tax that applies to holiday encashment.
So let us delve deeper into this very topic today.
Any leave encashment received during service is taxable. Income from salary is included in salary income. However, relief can be claimed under section 4 of the Income Tax Act.
Leave encashment received at the time of retirement or after resignation is completely tax free for Central and State Government employees. For employees other than that, the amount of leave encashment which is the lowest of the following amounts is tax free:
1. Amount notified by the government.
. Actual amount received in leave encashment.
. Amount of average salary for last 10 months.
. One day's pay x the number of unused leave (a maximum of 20 leave per year can be taken into account).
The salary mentioned in the above calculation includes basic salary, inflation allowance and commission based on fixed percentage of turnover.
E.g. Gopalbhai has resigned from company XYZ. His monthly salary is Rs 1.5 lakh. They get a maximum of 30 days off each year. At the time of leaving the job, the number of his remaining holidays was 20. The leave encashment received by him is one lakh rupees.
In this case, the tax-free leave encashment they get will be whichever is less of the following three amounts:
1. Amount notified by the government - Rs. 5 lakhs.
. Actual amount received in leave encashment - Rs. 1 lakh.
. Average Salary Amount for last 10 months - Rs. 15 lakhs (1.5 lakhs x 10 months).
. One day pay x Number of unused leave (maximum 20 leave per year can be taken into account in this calculation) -1.5 lakh rupees / 20 days = 3000 rupees daily x 60 days unused leave = 1 lakh rupees.
Thus Gopalbhai will get tax free leave encashment of Rs. 1 lakh. Gopalbhai then joined ABC Company and worked there for 10 years before retiring. His monthly salary was Rs 3.5 lakh. He was entitled to 30 days of leave each year. At the time of retirement, the number of unused leave was 100. The leave encashment he got is Rs 3 lakh.
We know that an employee gets a maximum tax free leave encashment of Rs. 5 lakhs throughout his career. Earlier, he had received tax-free leave encashment of Rs 1 lakh. For this reason, they will receive tax-free leave encashment, which is the lowest of the following amounts, in respect of the tax-free leave encashment they receive for the second time:
1. 5 lakh left from the maximum limit announced by the government.
. Amount of leave encashment actually received - Rs. 3 lakhs.
. Average salary for last 10 months - Rs. 5 lakhs (2.5 lakhs x 10 months).
. One day's pay x Number of unused leave (maximum 20 leave per year can be taken into account in this calculation) -2.5 lakh rupees / 30 days = daily 2000 rupees x 100 days unused leave = 2 lakh rupees.
According to the above calculation, the minimum amount is Rs. 3 lakhs. Thus, out of the total leave encashment of Rs 8 lakh received by Gopalbhai, leave encashment of Rs 3 lakh will be tax free. The remaining six lakh rupees will be taxable.
If an employer credits more than 30 days of leave per year, only 30 days of leave per year will be considered for the purpose of calculating leave encashment.
