Leave Encashment During Service
Leave salary paid while employment continues is ordinarily taxable as salary because the retirement/exit deductions in Section 19, Table serials 13 and 14 do not apply to an in-service surrender. Include it in the employer's Tax Year 2026-27 salary computation.
Leave Encashment on Retirement or Other Qualifying Exit
Section 19(1), Table serial 13 allows the entire qualifying payment for a Central or State Government employee. For another employee, Table serial 14 limits the deduction to the least of: 1. Actual leave-salary payment 2. The notified lifetime ceiling, currently ₹25,00,000 3. Ten months × average monthly statutory salary for the preceding ten months 4. Cash equivalent of earned leave standing to credit, with entitlement capped at 30 days for each year of actual service Use the statutory salary definition for this entry, including qualifying dearness allowance where the employment terms provide; do not substitute full gross salary or every allowance.
Calculation Example
Employee retiring after 20 years of service: • Average monthly salary (last 10 months): ₹1,00,000 • Leave entitlement: 30 days per year • Leave availed: 180 days total • Leave balance: (20 × 30) − 180 = 420 days • Maximum eligible days: 20 × 30 = 600 days (but capped at actual balance = 420 days, and further capped at 10 months = 300 days) Exempt amount (least of): 1. Actual encashment: Let's say ₹14,00,000 2. ₹25,00,000 3. 10 × ₹1,00,000 = ₹10,00,000 4. 300 days × (₹1,00,000 ÷ 30) = ₹10,00,000 Exempt = ₹10,00,000 (least of the four) Taxable = ₹14,00,000 − ₹10,00,000 = ₹4,00,000
Multiple Employer Leave Encashment
The ₹25,00,000 exemption limit is a CUMULATIVE lifetime limit across all employers. If you received ₹8L from Employer A on resignation and later ₹20L from Employer B on retirement: Total received: ₹28L Maximum exemption (cumulative): ₹25L Taxable: ₹3L (assuming other formula conditions are met) You must disclose previous leave encashment amounts in your ITR.
Official References
Source date: 2026-07-28. Confirm later notifications, rules and portal forms before filing or transacting.