Leave encashment limit raised to ₹25 lakhs

Finance Minister indeed becomes the tooth fairy for middle-class taxpayers with budget 2023.

Calling all retirees! Good news awaits as leave encashment is now tax-free until ₹25 lakhs. Enjoy the sweet taste of retirement without the bitter tax pill!

What does this mean?

The budget 2023 increased the tax exemption limit for leave encashment upon retirement for non-government salaried employees to ₹ 25 lakhs from ₹3 lakhs.

With a notification released on May 24th, 2023, the ministry also announced that the new exemption limit would have a retrospective effect from April 1st, 2023.

So, if you bid farewell to your workplace on April Fool’s Day this year(1st April 2023), rejoice, for you can now bask in the benefits of this extended tax-free bonanza.

Why did this happen?

The limit of ₹3 lakhs on leave encashment for non-government salaried employees was last fixed in 2002 when the highest basic pay in the government stood at ₹30,000 per month.

However, times have changed, and so have the rules. Hence, the FM brought about this change in the budget for 2023.

What is leave encashment?

When you’re paid for unused/unutilized paid leaves by your employer, it is known as leave encashment.

But as you know, nothing comes for free! This is an income that is taxable as per the IT Act. This means if you avail/not avail of these leaves during the period of employment, these are fully taxable for both government and non-government employees. However, at the time of retirement, the taxability rules differ for government and non-government employees.

  • For government employees
    The amount received towards leave encashment at the time of retirement is completely tax-free.

  • For non-government employees
    The amount received towards leave encashment at the time of retirement is tax-free to the extent of the least of the following:

    • ₹25,00,000 (ealier ₹3,00,000)
    • Actual amount received
    • Average salary of last 10 months * 10 months
    • Amount equivalent of not availed leave [unutilized leave in months (considering maximum 30 days leave per year) * Average salary of last 10 months]

Read more about Income from Salary & Taxes - Guide - Learn by Quicko

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