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Tax liability on Leave Encashment
Human Resources » Compensation & Benefits

Chrm Message From: jothiramani shreya Total Posts: 32 Join Date: 11/02/2009
Rank: Executive Post Date: 11/05/2011 12:34:09 Points: 160 Location: India

hi guys / gals,

appreciate clarification on following:

"Amount of Leave Encashment" "IS NOT TAXABLE" at the time of cessation of services due to resignation, retirement & other reasons.

Appreciate the right confirmation along with reference or clause ....

Chrm Message From: srini Total Posts: 163 Join Date: 11/02/2009  
Rank: Leader Post Date: 11/05/2011 12:35:05 Points: 815 Location: India


Section 17(1) (va) of IT Act 1961says that any payment received by an employee in respect of any period of leave not availed of by him is treated as salary. Therefore, it has tax liability.


Chrm Message From: savi989 Total Posts: 70 Join Date: 11/02/2009  
Rank: Manager Post Date: 16/05/2011 05:29:32 Points: 350 Location: India

Dear Shreya,

Leave Encashment in case of separation is non taxable upto the limit of Rs 2,50000/- as per income tax rule.


Leave Encasment in case of active employee is treated as salary & income tax as per rule & slab is applicable.

hopt this clarifies your doubt.


Chrm Message From: rakhip Total Posts: 24 Join Date: 11/02/2009  
Rank: Executive Post Date: 22/05/2011 02:22:36 Points: 120 Location: India

Dear srini,

I wanted to know that can a employee who has not availed there PL in a calender year can encash it at the end of the month? and if they can encash it on what basis it can be calculated? and why?

The management are not ready to give the employees the Pl encashment on the basis of BASIC SAL + HRA as we were doing in my previous company.i am really confused.

If you can pls help me in this it would be of gr8 help. I urgently req this as we are forming company policy.



Chrm Message From: srini Total Posts: 163 Join Date: 11/02/2009  
Rank: Leader Post Date: 22/05/2011 02:23:52 Points: 815 Location: India

Dear Rakhi,

There is no provision for encashment of PL in the Factories Act.

However, Sec 30 of the AP Shops & Establishments Act 1988 says that an employee who works for 240 days or more he is entiltled for 15 days PL. PL can be accumulated to the extent of 60 PL. An employee is entitled for encashment of Leave with Wages for a period of 8 days in every year and to be settled within a week of receipt of the application for such encashment from the employee.

Wage definition for encashment of PL will be as per Sec2(23) of the AP Shops & Establishment Act, 1988. This is AP State legislation.

Pl. refer your State Legislations for further clarifications.

Normally, for the encashment of PL every Orgn. will have their own policy.

In our Orgn. we allow our employees to accumulate PL to the extent of 120 and maximum of 240. In our Orgn. PL encashment is based on Basic Pay.

I hope these inputs may help u in framing your policies.


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