Leave Encashment: When It Is Taxable and the ₹25 Lakh Exemption
Rohit Menon
· Founder & Product Architect· 3 min read
Accumulated leave converted to cash is taxed differently depending on when it happens. During employment it is simply salary. At the end of it, a substantial exemption applies — one that was raised eightfold in 2023 and is still not widely known.
- ✓Encashment while in service is fully taxable as salary.
- ✓On retirement or resignation, Section 10(10AA) exempts up to ₹25,00,000 for non-government employees.
- ✓The exemption is the least of four amounts.
- ✓The limit is a lifetime ceiling across employers.
During service
Leave encashed while you remain employed is fully taxable as salary in the year of receipt. No exemption applies, whatever the amount.
Relief under Section 89 may be available where the encashment relates to leave accumulated over several years and pushes you into a higher slab, through Form 10E.
On retirement or resignation
For government employees, leave encashment on retirement is wholly exempt. For others, Section 10(10AA) exempts the least of four amounts:
- The actual leave encashment received.
- Ten months' average salary, based on the last ten months.
- Cash equivalent of unutilised leave, at a maximum of thirty days per completed year of service.
- The notified limit, raised to twenty-five lakh rupees with effect from 1 April 2023.
The lifetime ceiling
The twenty-five lakh rupee limit applies across all employers over your working life, not per job. Exemption claimed on an earlier retirement reduces what remains available later.
Employees who have changed jobs several times with encashment at each exit need to track the cumulative figure, which no single employer will do for them.
Both regimes
The Section 10(10AA) exemption is available under both the old and the new regime, like the gratuity exemption under Section 10(10). These are exemptions from salary rather than Chapter VI-A deductions, which is why they survived.
That makes retirement benefits one of the few areas where the regime choice makes no difference.
Frequently asked questions
### Is leave encashment taxable?
During service, yes, fully, as salary. On retirement or resignation, Section 10(10AA) exempts the least of four amounts for non-government employees, with a ceiling of twenty-five lakh rupees. Government employees are wholly exempt.
### Is the ₹25 lakh limit per employer?
No, it is a lifetime limit across all employers. Exemption claimed on an earlier exit reduces what remains available on a later one, and tracking the cumulative figure is the employee's responsibility.
### Is leave encashment exempt in the new regime?
Yes. The Section 10(10AA) exemption applies under both regimes, as does the gratuity exemption under Section 10(10). These are exemptions from salary rather than Chapter VI-A deductions.
Related Dyopact Tools & Templates
Frequently Asked Questions
Is leave encashment taxable?
During service, yes, fully, as salary. On retirement or resignation, Section 10(10AA) exempts the least of four amounts for non-government employees, with a ceiling of twenty-five lakh rupees. Government employees are wholly exempt.
Is the ₹25 lakh limit per employer?
No, it is a lifetime limit across all employers. Exemption claimed on an earlier exit reduces what remains available on a later one, and tracking the cumulative figure is the employee's responsibility.
Is leave encashment exempt in the new regime?
Yes. The Section 10(10AA) exemption applies under both regimes, as does the gratuity exemption under Section 10(10). These are exemptions from salary rather than Chapter VI-A deductions.
Rohit Menon
Founder & Product ArchitectArchitecting business document operating systems and automated billing workflows for Indian SMBs, agencies, and enterprises.