Tax on Leave Encashment
- During employment: fully taxable as salary.
- Government employees on retirement: fully exempt.
- Others on retirement or resignation: the exempt amount is the lowest of (1) the amount received, (2) ₹25 lakh minus any exemption claimed before (the limit applies for exits on or after 1 April 2023), (3) 10 months' average salary, and (4) cash value of unused leave, counting at most 30 days per year of service.
- “Salary” here generally means Basic + DA (and commission at a fixed percentage of turnover), averaged over the 10 months before leaving.
Section 10(10AA) refers to the Income-tax Act, 1961, which was renumbered by the Income-tax Act, 2025 from 1 April 2026.