I resigned in August 2024 and received leave encashment as part of my final settlement. While making the payment, the employer deducted tax on the full amount of leave encashment, contending that I had resigned and not retired. Is my employer right to deduct tax on leave encashment, as I understand this is exempt under Section 10?
Section 10(10AA) deals with exemption regarding leave encashment received by an employee. It provides that the cash equivalent of leave salary payable for leave to the credit of an employee, at the time of his retirement on superannuation or otherwise, is exempt subject to certain limits for non-government employees.
The exemption is available for leave encashment equal to a salary of ten months’ subject to a monetary limit of Rs. 25 lakhs. Please note that the monetary limit of Rs. 25 lakh is applicable for leave encashment received from one or more employers taken together during the entire working career. For government employees, the leave encashment received at the time of retirement is fully exempt.
Since the words used in the section are “retirement on superannuation or otherwise”, in my opinion, “superannuation of otherwise” would also include retirement due to resignation. The Mumbai High Court, in the case of Commissioner Of Income-Tax vs D.P. Malhotra 229 ITR 394, has rightly observed that on acceptance of resignation, the employee stands retired from service. Since the word retirement has been used for both situations, i.e. retirement on superannuation and otherwise, the exemption is available to an employee who leaves his employment under other circumstances as well. What is relevant is ‘retirement’. How it took place is immaterial for the purpose of the clause. Please note that the exemption is available for encashment of accumulated on retirement and not encashment of accumulated leave while continuing the employment.
Your employer is being extra cautious and has, therefore, deducted tax on the full amount of leave encashment paid to you, which is against the law’s intention. I advise you to claim the exemption while filing your returns.
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Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant his X handle
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