Budget 2023: Big jump in leave encashment limit for non-govt staff

A salaried person is entitled to a minimum number of paid leave every year.

In a positive move for taxpayers, the government has increased the limit for leave encashment from Rs 3 lakh to Rs 25 lakh, Finance Minister Nirmala Sitharaman announced while announcing Budget proposals for the financial year 2023-24

“The limit of Rs 3 lakh for tax exemption on leave encashment on the retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was Rs 30,000 per month. In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lakh,” the FM said.

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A salaried person is entitled to a minimum number of paid leave every year. However, it is not necessary that an individual employee utilises all the leave he is entitled to in a year. Further, salaried individuals also have an option of carrying forward such unutilised paid leaves.

This leaves the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.

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“Encashment of earned leave of up to 10 months of average salary, at the time of retirement in case of an employee (other than an employee of the central government or state government), is exempt under sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act to the extent notified. The maximum amount which can be exempted is Rs 3 lakh at present. It is proposed to issue notification to extend this limit to Rs 25 lakh," said Chetan Chandak, Director, TaxBirbal, a tax consultancy firm.

For family pensioners, the FM has introduced a standard deduction. Individuals with an income of Rs 15.5 lakh or more will stand to gain Rs 52,500, the finance minister said in her speech.