Earned leave encashed at retirement is exempt from tax up to a maximum of Rs 3 lakh

The earned leave encashed during service is fully taxable as salary income in the hands of the employee but earned leave encashment at retirement is eligible for tax concessions. When you retire, the total amount of earned leave will be calculated by taking 30 days earned leave for every year of completed service multiplied by the total service period.

The average of the last 10 months salary is taken into account for calculation. The amount of leave encashed during the service period will be deducted from the total leave calculated on the basis of number of years served. For instance, if a person has worked for 20 years, he can encash leave for 600 days (30 days for every year multiplied by 20 years). Suppose, out of this, he has already encashed 200 days during his service period then he can encash only 400 days of earned leave on retirement. The amount calculated as above is tax-free up to a maximum amount of Rs. 3 lakh.


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