Tax-exempt leave encashment at retirement.
Tax-exempt portion
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Taxable portion
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Tax on it
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Your breakdown
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When leave encashment is tax-free and when it is not
Timing changes everything. If you encash leave while still in service, perhaps at year-end or while switching jobs, the entire amount is taxable as salary, no exemption applies. The Section 10(10AA) exemption is reserved for leave encashed at the time of retirement or resignation. For a central or state government employee, that retirement encashment is fully exempt with no ceiling. For everyone in the private sector, the exemption is limited, which is exactly what this calculator works out.
The least-of-four test, and the 25 lakh ceiling
For a non-government employee the exempt amount is the least of four figures: the actual leave encashment received, the statutory ceiling, ten months of average salary based on the last ten months, and the cash equivalent of unused leave subject to a maximum of 30 days of leave per completed year of service. The statutory ceiling was stuck at a stingy 3 lakh for nearly two decades. A 2023 notification, effective from April 2023, raised it dramatically to 25 lakh, and this tool uses that 25 lakh figure. The calculator compares your actual amount, the 25 lakh cap, and ten months of average salary, and takes the smallest.
A retiring manager’s encashment
Consider a private-sector manager retiring with 18 lakh of leave encashment, whose average monthly salary over the final ten months was 1.5 lakh, putting her in the 30% slab. Ten months of average salary is 15 lakh, which is the smallest of the four limits.
So 15 lakh escapes tax, 3 lakh is taxable, and the tax on it is 90,000 before cess. The chart splits the 18 lakh payout.
The lifetime cap that trips up job-hoppers
Here is an edge case people miss entirely. The 25 lakh exemption is a lifetime limit, not a per-employer one. If you claimed leave encashment exemption when you left an earlier job, that amount is deducted from your 25 lakh ceiling for any later claim. So someone who took 10 lakh exempt at a previous retirement has only 15 lakh of headroom left. The same logic means salary for this purpose is basic pay plus dearness allowance that forms part of retirement benefits, plus any fixed-percentage commission, not your gross CTC. Using gross salary inflates the ten-month figure and gives a wrong, optimistic exemption.
Does the exemption survive under the new tax regime?
Yes. Section 10(10AA) for leave encashment, like gratuity and commuted pension exemptions, is one of the few exemptions that continues under the new regime. So even if you have opted out of the old regime and lost 80C and HRA, your retirement leave encashment up to the limit stays tax-free.
Can I reduce the tax on the taxable portion?
If the taxable balance pushes you into a higher bracket in the retirement year, you can look at Section 89(1) relief, which spreads the salary-in-arrears style bunching across years and is claimed by filing Form 10E before your return. It will not always help with leave encashment specifically, but it is worth checking when a large lumpsum lands in one year.