The government has hiked the tax exemption limit on leave encashment for non-government salaried employees at the time of retirement from Rs 3 lakh to Rs 25 lakh. The move is likely to benefit a host of employees, from the private sector to public sector firms as well as entities such as AIIMS.
The changed tax structure, which has been brought into effect from April 1, 2023, is expected to benefit 50 percent of personal income taxpayers, who are salaried workers.
During her Budget 2023-24 speech, Finance Minister Nirmala Sitharaman had noted that 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,” she had said.
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“The aggregate amount exempt from income-tax under section 10(10AA)(ii) of the Act shall not exceed the limit of Rs 25 lakh where any such payments are received by a non-government employee from more than one employer in the same previous year,” the Central Board of Direct Taxes (CBDT) said in a statement.
Leave encashment after retirement or resignation is taxable as ‘Income from Salary.’ However, the salaried can claim an exemption under Section 10 (10AA)(ii) of the Income-tax Act.
Any payment received as a leave encashment at the time of retirement or otherwise upon leaving the work is exempt up to the least of the sums listed in Section 10 (10AA)(ii). The ceiling has now been raised to Rs 25 lakh.
"This tax exemption increase would effectively translate into potential savings of Rs 7 lakh in taxes that would have been payable before this amendment," Revenue Secretary Sanjay Malhotra told The Hindu.