If you are a workaholic and are planning to switch jobs or retire soon from a private company, the revenue authorities have good news for you.
The amount paid as leave encashment would now be tax-free up to Rs 25 lakh. The cap for non-government employees as earlier Rs 3 lakh. However, this tax-free limit applies only to leaves encashed at the time of retirement or resignation.
Note that if you seek money against balance leave—medical, privilege or casual leave—while being in service, the leave encashment would be completely taxable for private sector employees.
The tax-free limit of Rs 25 lakh would apply to multiple employments during a year too. So, if you have just encashed leaves worth Rs 23 lakh from Employer A in May 2023 and later quit a job in March 2024 and encashed another Rs 3 lakh worth of leaves, the tax-free portion of the leave encashment will remain Rs 25 lakh, meaning in this instance Rs 1 lakh will be taxable.
“On the amount exceeding Rs 25 lakh, one would have to pay income tax for leave encashment based on the tax bracket,” says Karan Batra, co-founder, CharteredClub.com.
Retired during the current financial year
Even though Finance Minister Nirmala Sitharaman had announced the enhancement in tax-exemption limit for leave encashment of up to Rs 25 lakh in Budget 2023, the official notification has just been issued.
Chances are that if you retired prior to May 24, 2023, the employer would have assumed the tax-free limit to be Rs 3 lakh. You can revert to the employer and request for the additional amount of leave encashment if it was due.
“If you have resigned and claimed leave encashment for April-May 2023, before the notification came in, and were handed over only Rs 3 lakh tax-free as leave encashment due to the limit, clarity has been issued for employers stating that Rs 25 lakh can be handed over tax-free,” says Ameet Patel, partner at Manohar Chowdhry & Associates, a chartered accountancy firm.