1. Defined benefit plans allow employees to earn various types of leaves including casual, sick, and privilege leaves. 2. Employees can encash unused leaves either during employment or at retirement. Leave encashment during employment is fully taxable while encashment at retirement is partially tax exempt under Section 10(10AA). 3. For other employees, leave encashment at retirement is exempt up to the minimum of actual encashment, 10 times average salary of last 10 months, Rs. 300,000, or cash equivalent of 30 days unavailed leave per completed year of service calculated on maximum salary.

1. Defined Benefit Plans
LEAVE ENCASHMENT

2. Different types of leaves that an employee
may have :
a. Casual Leave
b. Sick Leave
c. Privilege Leave
g

3. Casual Leave
For casual or Emergency purposes
To be used within year
No
N carry fforward
d
No accumulation

4. Sick Leave
For sickness purposes
Carry forward
Accumulation generally allowed as per
A l ti ll ll d
service rules

5. Privileged Leave
1.
1 For general purposes
purposes.
1. It can be carry forwarded and
accumulated during service as per service
rules.
2. is non- t t t
2 It i non-statutory bbenefit t employees
fit to l
on exit from service

6. Taxation
ENCASHMENT DURING THE COURSE of
EMPLOYMENT
1. Is fully taxable

7. Taxation
Encashment of accumulated leave at the
time of retirement Section 10(10AA)(i)
a. Is fully exempt for only Central and
State government employees
l

8. Taxation
b. OTHER EMPLOYEES Section 10(10AA)(ii)
LEAVE ENCASHMENT is exempt minimum of
the following :
1. Leave Encashment actually received
1
2. 10 * Avg salary of last 10 months
3. Rs 300000
3 Rs.300000
4. Cash equivalent of un-availed leave calculated
un-
on the basis of maximum 30 days leave for
every completed year

9. SALARY = Basic Pay + D. A forming part of
D A.
retirement benefit + Commission
based upon fixed % of the turnover

10. Average salary
Average of the salary drawn by the
employee during the period of
10 months immediately preceding the
retirement.

11. LEAVE SALARY paid to legal heirs of a
deceased employee is
not liable to tax.
tax.

12. Concept Ch k
C t Checkers

13. 1 If earned leave credited to Rohit’s a/c is
1. Rohit s
40 days per year, what will be the
maximum permissible un-availed leave
un-
under the income tax act, 1961 if he
served for 26 years?

14. Ans. 26*30
Ans 26 30 = 780

15. Q2 If earned leave credited to Mohit’s a/c is
Q2. Mohit s
24 days per year, what will be the
maximum permissible un-availed leave
un-
under the income tax act, 1961 if he
served for 30 years?

16. Ans. 24*30
Ans 24 30 =720

17. Q3. Mr. X joined on 1st December 1980 in
Q3 Mr
XYZ Ltd. and retired on 1st December
2002.
2002 He got leave encashment of
Rs.415000. His last drawn salary is
Rs.40000.His
Rs 40000 His last 10 months salary is 3.5
35
lacs. He availed 160 leave during the
service.
service What will be his taxable leave
salary amount?

18. Ans.
Ans 115000
Least of four is exempted
i. A t ll received i.e. 415000
Actually i di
ii. 300000
iii. 10*(350000/10) * = 350000
iv. (22 30 160)/30
iv (22*30-160)/30 * 35000 = 583333.333
583333 333
Taxable ( 415000 – 300000 ) = 115000

19. Q4. Mr
Q4 Mr. Y joined on 1st January 1985 in XYZ
Ltd. and retired on 1st August 2008. He
got leave encashment of Rs 315000 His
Rs.315000.
last drawn salary is Rs.22000.His last 10
months average salary is 25500. He
25500
availed 340 leave during the service. What
will be his tax-exempted leave salary
tax-
amount?

20. Ans.
Ans 297500
Sol. Least of four is exempted
i. 315000
ii. 300000
iii. 10*25500=255000
iv. (23 30 340)/30 25500=297500
iv (23*30-340)/30 *25500=297500

21. Q5. Mr. X joined on 1 1 91 and retires on
1-1-91
1/1/08.
He got amount of Rs.36000 as leave
encashment salary against 150 days of
unavailed leave. His employer provides 40
p y p
days leave for each year of service.
How much amount of leave salary would be
y
tax free if his Average salary for the last
10 months is Rs.8000

22. Ans. Nil
Sol least of four is exempted
i. 36000
i
ii. 300000
iii 10*8000
iii.
iv. 0/30 * 8000
Max permissible leave 17*30=510
Leave taken (17*40-150) = 530

23. Q6
Q6. Mr. X putting service 12 y s During se ce he
putt g se ce yrs. u g service e
availed 4 months leave and had 250 days un-
availed leave at credit.
His
Hi employer pays encashment benefit on the last
l h b fi h l
drawn salary on surrendering of un-availed leave
up to 12 months.
The employee’s terminal salary was Rs.46000 and
Avg salary was Rs.45000 p.m. What was the
amount of leave salary paid to him by the
employer?

24. Sol.
Sol 250/30 * 46000 = 383333.3333
383333 3333

25. Q
Q7. Mr. A was employed with ABC Ltd. He retired
p y
w.e.f. 1-2-2008 after completing a service of 25
1-
years and 8 months. He submits the following
information :
i f i
Basic Salary Rs.15000 p.m. at retirement
D.A. 100% of basic (40% of
which forms part of salary of
retirement benefits)
He was entitled to 40 days leave for every year of
service.
service He received leave encashment
amounting to Rs.60000 on account of 280 days
leave. Calculate taxable amount.

26. Ans. (60000 000) = 39000
s (60000-21000)
Sol. Least of four is exempted
i. 60000
ii. 300000
iii. 10*(15000+15000*.4)=210000
iv. 30/30*21000=21000
Max permissible leave as per act =25*30
= 750
Leave already taken (25*40-280) = 720

27. Q8. Mr. X had been working with AAA Ltd. in a
tribal area since 01-12-1996.
01-12-
Basic Salary y Rs.8000 p.m. at retirement
p
D.A. 40% of Basic (50% of which forms part
of salary for retirement benefits)
y )
2% commission on turnover Rs.500000 at the end
of year.
He retires on 15-1-2009. He receives Rs.250000 of
15-
accumulated leave of 235 days. He was entitled
to 35 days leave for every year of service.
Calculated taxable amount?

28. Ans. (250000-60861.1) = 189138.9
( )
Sol. Least of four is exempted
i. 250000
ii. 300000
iii. 10*10433.333=104333.333
iv. 175/30 10433.333 60861.1
175/30*10433.333=60861.1
Avg salary = (8000+8000*.4*.5+500000*.02/12)=
10433.333
Max permissible leave = 12*30=360
12*30 360
Availed leave during employment(12*35-235) = 185
Encashable leave 360-185 = 175

29. Q9. Mr. y retires on March 10, 2008 from a private
sector company after rendering 39 years of
t ft d i f
service. According to the service rules he is
entitled for 26 days leave for each year of
completed service. During his service he has
l d i D i hi i h h
availed and encashed his leave of 120 days and
160 days respectively. Basic and D.A. (forming
y p y ( g
part of retirement benefit) Paid to Mr. y as
follows :
Period basic p.m.
pm D.A
DA
1-4-07 to 31-11-07
31-11- 6000 1200
1-12-07 to 10-03-08
12- 10-03- 8000 1400
At retirement he got leave encashment Rs.258000
Find the leave salary chargeable to Tax.

30. Q10. Mr. Ram retires on May 20, 2008 from a
private sector company after rendering 32 years
of service. According to the service rules he is
entitled for 36 days leave for each year of
completed service. During his service he has
availed and encashed his leave of 100 days and
150 days respectively Salary and D A
respectively. D.A.
(forming part of retirement benefits) Paid to Mr.
Ram as follows :
Period basic p.m. D.A
1-4-07 to 31-12-07
31-12- 5000 1000
1-1-08 to 20-08-08
t 20-08- 6000 1200
At retirement he got leave encashment Rs.218000
Find the leave salary chargeable to Tax
Tax.