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Normally a salaried person is allowed to have leave one or two per month. If he doesn’t take these leave on time, these are accumulated and paid at the time of retirement or leaving the job. This is called leave salary. However, the rules are different organization to organization, as how to pay the leave salary.

What is the rule: - Leave salary rule say that if the leave is not taken with in the year, the leave salary amount may be accumulated, encashed or lapse. These rules are different company to company. The leave salary amount may be encashment during the service time or retirement or leaving the job time.
Taxation of the leave salary: - Taxation of the leave salary amount is different to the nature of encashment which is as follows.

Encashment during service time: - If the leave salary encash during the service tenure, it is taxable whether the employee is government employee or the private employee.
Encashment at the retirement of the service: - If the leave salary is encaShed at the retirement of the salary, the rules are different to government employees and the private employees.
In the case of government employees, the full amount of leave salary is exempt from tax and it is tax free.
In the case of private employees, income tax department give some relief to the employees with the section 10(10AA) of the income tax act.  The minimum of these are exempt from income tax which is as follows.
-          Cash equivalent to leave salary.
-          10 month average salary.
-          3 lakhs
-          The amount actually received at the time of retirement.
The minimum of these is exempt from income tax under section 10(10AA) of the income tax act.
Difference between retirement or leaving the job and income tax view: - Section 10(10AA) says that “retirement or otherwise”. Otherwise mean the termination of service between employer and employee. So the rule is same in the case of employee is retired or leave the job. He can claim exemption under section 10(10AA) of the income tax act. Retirement may be of various kinds, may be superannuation or voluntary.
So result is both retirement and Resignation is the end of relation with the employer.
Section 10(10AA) benefits on leave salary are both for the employee’s retirement or leaving the job.
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