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Leave encashment

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  • I am working in a Pvt Ltd company.Our company bifurcated our salary in various allowances i.e Basic+HRA+Medical Allowance+Conveyance Allowance+Special Allowance etc for the purpose of saving Income Tax, Bonus Payment,ESI Payment etc. Our Basic Salary is low and company encashed leave on Basic Salary. Is it correct on legal ground?
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Leave encashment

  1. 1. LEAVE ENCASHMENT GROUP NO: 1 MEMBERS: Aashima kapil Manish thakur Anupam aditya Anand singh negi Hargovind sahu Hemlata yadav
  2. 2. LEAVE ENCASHMENTEmployee’s defined benefit. Employees are entitled to various types of leave while • they are in service. Under this benefit,employee gets cash payments for unavailing the allowed leaves in each year that he has accumulated. The cash value of those leave will be deducted from the paymentswhich have been already availed by the employee. Hence the cash payment availed by the employee in return of the unavailed leave is known as leave encashment.
  3. 3. Objective of leave encashmentIt encourages employees to avail the leave on planned & systematic basis.For employer it favours that his work is done dy his employees in a smooth manner.For employees ,if they don’t avail their leave then they are rewarded in the form of leave encashment.But in case,when employees avail the leave within the limit of leave allowed to them by their employer,atleast they don’t get deduction from their basic salary.
  4. 4. Types of leaves  For emergency purposes.  No accumulation. Casual leave  Have to avail within the year only.  For sickness.  Accumulation allowed as Medical leave per service rules.  For general purposes.  Carry forward is allowed. Privileged leave  Non-statutory benefit to employee on exit from service.
  5. 5. Employees are classified in to two categories. 2.Non-Government1. Government employees. employee.  Leave encashment during the  Leave encashment during the service is always taxable. service is always taxable.  Encashment of accumulated  Encashment of accumulated leave at the time of leave at the time of retirement retirement is fully exempt. is exempt up to some extent .  The govt.employees are not  The non-govt. employees are allowed to accumulate leave allowed to accumulate leave for more than 10 months. per the norms of employer.
  6. 6. LEAVE ENCASHMENTThe unavailed leave has to be calculated on the basis of max 30 days leave for every completed year of services. But if employer has provided leave,which is less than 3o days in a p.y ,then this calculation shall be based on such no.of leaves. If any employee retires from more than 1 employer then the exemption for each employer shall be calculated separately but the total exemption shall not exceed Rs.3,00,000 . Leave salary received by the family members after death of the employees is fully exempt from tax.
  7. 7. LEAVE ENCASHMENT 10 months last drawn salary of just preceding the date of retirement is considered as the average salary. Salary considersd in the calculation of unvailed leave is =B.S+COMISSION(fixed %)+D.A* Government employees mean employees of central govt or state govt. For non govt.employees, least of below 4 values shall be exempt of tax from the accumulated leave encashment. i)actual amount received. ii)Rs.3,00,000 iii)10 x avg salary iv) avg salary x unavailed leave/30. Leave salary paid to legal heirs of a deceased employee is not liable to tax.
  8. 8. Several case study1. Rohit’s employer has credited him the leave of 40 days per year………..then also the maximum permissible unavailed leave under the IT act,1967 for the 26 yrs of service is _________=26 x 30 = 780.2. If in case, 25 days are credited to rohit being a non govt employee ……..then the permissible unavailed leave will be _______= 26 x 25 = 650.(as less than 30 days is considered).3. Mr.j is an govt employee & got Rs. 50,000 as leave encashment at the time of retirement. then______complete amount will be exempt as Mr.j is an govt employee.4. Mr.j gets the same amount as leave encashment during his continue service then_____his income will be added in the gross total income & will be taxed according to the slab rate in which he falls in to.
  9. 9. Case study 3.Mr.x ,non govt employee retired after serving for 16 years & 7 months to the firm.at retirement he received a sum of Rs.50,000 as leave encashment for unavailed leave of 300 days.he was entitled for 40 days leave per year. Basis salary is Rs.4800 p.m. compute leave encashment exempt from tax?  least of the following is tax exempt: 1. 50,000 (actual amount received) 2. 3,00,000 (maximum amount exempted) 3. 10 x 4800 = 48000 (10 x 10 months average salary) 4. 4800 x 140/30 =22400 (avg salary x unavailed leave /30) How to compute un-availed leave?
  10. 10. How to compute unavailed leave?Calculation of company Tax lawunavailed leave:Leave allowed 40 days per year 30 days per yearCompleted years 16 years 16 yearsTotal leave allowed 16 x 40 =640 days during 16 x 30 =480 days during the whole service. the whole service.Unavailed leave 300 (given)Availed leave 640—300 = 340 340Unavailed leave 300 (given) 480—340 = 140
  11. 11. If any queries?

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