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+{{htmlmetatags>metatag-description=(Is leave encashment taxable? Section 10 10AA fully exempts government retirees and private staff up to Rs 25 lakh, the least of four amounts. Example inside.)&metatag-keywords=(leave encashment tax exemption, is leave encashment taxable, section 10 10AA, Rs 25 lakh limit, leave encashment calculation)&metatag-robots=(index,follow)&metatag-og:title=(Leave Encashment Tax Exemption: Section 10 10AA, Rs 25 Lakh)&metatag-og:description=(Is leave encashment taxable? Section 10 10AA fully exempts government retirees and private staff up to Rs 25 lakh, the least of four amounts. Example inside.)&metatag-og:type=(article)}}
+====== Leave Encashment Tax Exemption: Section 10 (10AA), Rs 25 Lakh ======
+{{ :social:auto:leave-encashment-tax-exemption-section-10-10aa-india.png?direct&1200 |Leave Encashment Tax Exemption: Section 10 (10AA), Rs 25 Lakh — RTI Wiki}}
+<WRAP info>
+**Quick Reply:** Leave encashment at retirement is governed by Section 10(10AA) of the Income-tax Act 1961. For Central and State Government employees it is fully exempt. For private and PSU employees it is exempt up to the **least of four** amounts, with an overall cap of **Rs 25,00,000** (raised from Rs 3 lakh with effect from 1 April 2023). Encashment taken **during** service is fully taxable.
+</WRAP>
+If your employer paid you for unused earned leave when you retired, the first question is simple: how much of it can you keep tax-free? The answer depends on one thing above all else, whether you worked for the government or for a private or public-sector employer. This guide gives you the exact rule, the four-figure calculation, and a worked example with real numbers.
+===== The exemption rule: least of four amounts (private and PSU staff) =====
+For a non-government employee, the exempt portion of leave encashment received **at retirement or resignation** is the **lowest** of these four figures:
+  - The overall monetary limit notified by the Central Government, currently **Rs 25,00,000**.
+  - The **actual** leave encashment amount received from the employer.
+  - **10 months average salary**, that is, the average monthly salary of the last 10 months immediately before retirement, multiplied by 10.
+  - The **cash equivalent of unutilised earned leave**, where leave is capped at **30 days for each completed year of service** (reduced by any earned leave already availed), valued at the average monthly salary.
+Whatever amount is left after subtracting the exempt portion from what you actually received is added to your salary income and taxed at your slab rate. The Rs 25,00,000 is a **lifetime** ceiling: it is reduced by any Section 10(10AA) exemption you have already claimed in earlier years or from another employer.
+==== Worked example: Meera Iyer, retiring branch manager ====
+Meera Iyer retires from a private bank in Pune on 31 March 2026 after **28 completed years** of service. Her average monthly salary (basic salary plus dearness allowance that forms part of retirement benefits) over her last 10 months is **Rs 80,000**. She had **300 days** of unutilised earned leave, and the bank paid her **Rs 8,40,000** as leave encashment.
+The four amounts are:
+  - **Statutory limit:** Rs 25,00,000.
+  - **Actual amount received:** Rs 8,40,000.
+  - **10 months average salary:** Rs 80,000 x 10 = **Rs 8,00,000**.
+  - **Cash equivalent of leave:** her 30-days-per-year cap is 28 x 30 = 840 days, which is more than her 300 unutilised days, so 300 days count. 300 days is 10 months (300 / 30), valued at Rs 80,000 = **Rs 8,00,000**.
+The **least** of these is **Rs 8,00,000**. So Rs 8,00,000 is exempt, and the balance, **Rs 8,40,000 minus Rs 8,00,000 = Rs 40,000**, is taxable as salary in FY 2025-26.
+Notice that the Rs 25 lakh cap did not bind at all. For most private employees it is the **10 months average salary** leg that is the real ceiling, which is why many cannot shelter the full Rs 25 lakh.
+===== Government vs non-government: the decisive split =====
+^ Type of employer ^ Tax on leave encashment at retirement ^
+| **Central Government** | Fully exempt under Section 10(10AA)(i). |
+| **State Government** | Fully exempt under Section 10(10AA)(i). |
+| **Private sector / PSU / nationalised bank / autonomous body** | Exempt only up to the least of the four amounts above, capped at Rs 25,00,000. |
+| **Any employee, encashment taken during service** | Fully taxable. Relief under Section 89 may be claimed via Form 10E. |
+Employees of public-sector undertakings and nationalised banks are treated as **non-government** for this purpose, not as government servants, so they fall under the Rs 25 lakh four-part rule, not the full exemption.
+===== What counts as salary here =====
+For the 10-months-average and cash-equivalent legs, "salary" means:
+  * **Basic salary**, plus
+  * **Dearness allowance**, to the extent it forms part of retirement benefits, plus
+  * **Commission** received as a fixed percentage of turnover achieved by the employee.
+House rent allowance, overtime, bonus, and other allowances are **not** included.
+===== How the Rs 25 lakh limit reached its current level =====
+For two decades the cap for non-government employees was stuck at **Rs 3,00,000**, a figure notified back in 2002. The Finance Minister announced an increase in the 2023 Budget, and the Central Board of Direct Taxes gave it effect through **Notification No. 31/2023 dated 24 May 2023**, raising the ceiling to **Rs 25,00,000** with effect from **1 April 2023**. The new limit applies to non-government employees retiring on or after that date.
+===== How to report leave encashment in your ITR =====
+  - Obtain Form 16 from your employer; the leave encashment figure appears under salary.
+  - Compute the four amounts and identify the least, that is your exempt figure.
+  - In the ITR salary schedule, report **gross salary**, then claim the exempt portion under the **Section 10(10AA)** dropdown ("Cash equivalent of leave salary encashment").
+  - The taxable balance, if any, stays inside taxable salary and is taxed at slab rate.
+  - If you encashed leave **during** service and your income spiked, file **Form 10E** before filing your return to claim Section 89 relief.
+===== Common mistakes =====
+  * **Assuming the full Rs 25 lakh is yours.** The cap is only one of four figures; the least usually wins, often the 10-months average (Section 10(10AA)(ii)).
+  * **Treating a PSU or bank job as a government job.** PSU and nationalised-bank staff are non-government for Section 10(10AA), so the cap applies.
+  * **Claiming exemption on encashment taken during service.** That is fully taxable; only Section 89 relief via Form 10E may soften it.
+  * **Forgetting the lifetime nature of the cap.** The Rs 25,00,000 is reduced by exemption already claimed in earlier years or from another employer.
+  * **Counting more than 30 days of leave per completed year.** The cash-equivalent leg caps creditable leave at 30 days for each completed year of service.
+===== Frequently asked questions =====
+==== Is leave encashment taxable? ====
+At retirement it is partly or fully exempt under Section 10(10AA): fully for government employees, and up to the least of four amounts (cap Rs 25,00,000) for others. Leave encashment taken during service is fully taxable.
+==== What is the leave encashment exemption limit for private employees? ====
+The overall cap is Rs 25,00,000, raised from Rs 3,00,000 with effect from 1 April 2023. The actual exempt amount is the least of four figures, so it is often lower than Rs 25 lakh.
+==== Are government employees fully exempt on leave encashment? ====
+Yes. Central and State Government employees receive a full exemption on leave encashment at retirement under Section 10(10AA)(i), with no monetary cap.
+==== Are PSU and bank employees treated as government employees? ====
+No. Employees of public-sector undertakings, nationalised banks, and autonomous bodies are non-government for Section 10(10AA), so the Rs 25 lakh four-part rule applies to them.
+==== What is the Rs 25 lakh limit and when did it apply? ====
+It is the maximum leave encashment exemption for non-government employees, notified by CBDT in Notification No. 31/2023 dated 24 May 2023, effective 1 April 2023.
+==== What salary is used in the leave encashment calculation? ====
+Basic salary, dearness allowance to the extent it forms part of retirement benefits, and commission as a fixed percentage of turnover. Other allowances like HRA and bonus are excluded.
+==== Is the Rs 25 lakh limit per job or for a lifetime? ====
+It is a lifetime aggregate. The Rs 25,00,000 ceiling is reduced by any Section 10(10AA) exemption you have already claimed in earlier years or from another employer.
+==== How do I claim relief if I encashed leave during service? ====
+Encashment during service is fully taxable, but you can claim relief under Section 89 by filing Form 10E on the income-tax portal before submitting your return.
+===== Sources =====
+  * Income-tax Act 1961, Section 10(10AA) - leave encashment exemption.
+  * CBDT Notification No. 31/2023, F.No. 200/3/2023-ITA-I, dated 24 May 2023, specifying Rs 25,00,000 as the limit under Section 10(10AA)(ii), effective 1 April 2023.
+  * Press Information Bureau release on the increased leave encashment exemption for non-government salaried employees.
+  * ClearTax, "Leave Encashment - Tax Exemption, Calculation and Formula": https://cleartax.in/s/leave-encashment-tax
+===== Related guides =====
+  * [[https://righttoinformation.wiki/hra-exemption-calculation-section-10-13a-india|HRA exemption under Section 10(13A)]]
+  * [[https://righttoinformation.wiki/section-80ccd-1b-nps-additional-50000-deduction-india|Section 80CCD(1B): extra Rs 50,000 NPS deduction]]
+  * [[https://righttoinformation.wiki/act|The RTI Act 2005, full text]]
+  * [[https://righttoinformation.wiki/tools/ai-rti-draft-app.html|Draft an RTI application online]]
+  * [[https://righttoinformation.wiki/book|The RTI Playbook]]
+{{tag>leave encashment tax exemption section lakh}}