Leave Encashment refers to the amount paid by an employer to an employee in exchange for unused leave days. In India, this benefit can be received during employment, at the time of retirement, resignation, or upon termination. It is considered part of the employee’s salary income and may be taxable, depending on the circumstances under which it is received.
For salaried individuals, the Income Tax Act provides partial or full exemption on leave encashment under Section 10(10AA), especially at the time of retirement. For instance, government employees usually receive full exemption, whereas private-sector employees may receive exemption subject to specified limits.
From a compliance perspective, businesses must include leave encashment amounts in payroll records and deduct tax at source (TDS) as applicable. Proper documentation and payroll software can help ensure accurate calculation and timely reporting to avoid scrutiny or penalties during audits or filings.
For small business owners and startups, understanding leave encashment is important when setting up employee benefits and compensation structures. It also plays a role in managing HR policies, labour law compliance, and tax planning.
To learn more about income tax rules applicable to salary components like leave encashment, visit FinTax24’s Income Tax Solutions.