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Leave Encashment: Good news! Finance Minister increased the tax exemption limit in leave encashment from Rs 3 lakh to Rs 25 lakh.

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If the amount of your leave encashment is up to 25 lakhs or less, then the government will not charge you any tax on it. However, this new rule will be applicable from April 1.


In Budget 2023, Finance Minister Nirmala Sitharaman has given great relief to private employees. The Finance Minister has increased the tax exemption limit for leave encashment from Rs 3 lakh to Rs 25 lakh. That is, now if the amount of your leave encashment is up to 25 lakhs or less, then the government will not charge you any tax on it. However, this new rule will be applicable from April 1. After this announcement of the Finance Minister, there is a lot of discussion about Leave Encashment because the limit of tax exemption on Leave Encashment was last done in the year 2002, when the limit of basic salary was 30 thousand rupees per month. Let us know what is leave encashment and what are its rules.

What is leave encashment

When you work in a company, you are given many types of holidays including Sick Leave, Casual Leave and Earned Leave. Some of these holidays are such that, if they are not taken for a fixed time, they end on their own and some holidays do not end and are added to the New Year holidays. If you work in a company for a long time and keep saving such holidays, then you have many holidays accumulated. In such a situation, on retirement or leaving the job, the employee is given money in lieu of those holidays. This is called Leave Encashment. In the salary structure, all the employees are given information about how many holidays they will get in a year and how much they can cash.

Why tax is levied on leave encashment

The amount received from holidays is considered a part of income, so the government imposes tax on it. Till now, the amount received by the employees under leave encashment at the time of retirement or resignation was not taxed up to three lakhs, but the amount more than this was taxed. But after this announcement by the government, no tax will be levied on the amount up to Rs 25 lakh. Tax exemption can be claimed under section 89 of the Income Tax Act on the amount received under leave encashment. Although the employees of Central and State Governments did not have to pay any tax on leave encashment earlier also. At the same time, no tax is levied on leave encashment even in case of death of the employee.

What is the rule

Generally, in any company, there is a rule to encash maximum 30 holidays for a year. The government also gives tax exemption on Leave Encashment of maximum 30 holidays annually. However, in this case the rules of the company may also be different. In some companies, encashment of leave is done only after the completion of the year, while in some companies this amount is given lump sum at the time of leaving the company. Leave encashment is calculated on the basis of basic pay and dearness allowance and there is no leave encashment in case of termination.

Leave encashment is not mandatory

For the purpose of encouraging employees towards maximum work, companies provide Leave Encashment facility, but there is no government rule for Leave Encashment. That is, if a company does not encash your leave, then you cannot file a case against it. Whether or not to provide the facility of Leave Encashment depends on the company.

Which holidays have encashment

There are many types of holidays in organized sector companies – Sick, Casual, Earned and Privilege. Sick and casual leaves lapse if not used in a calendar year, but earned leave and privilege leave are considered eligible for encashment. But, every company can set its own terms and conditions for these.

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