Leave Encashment
Have you ever wondered if your accumulated leaves could translate into additional income? The concept of leave encashment is familiar among the salaried class, offering an avenue for individuals to derive financial benefits from their unutilized paid leaves. In this article, we delve into the intricacies of leave encashment, exploring its meaning, various leave types, and associated taxability aspects.
Leave Encashment Explained:
As per labour laws, every salaried individual is entitled to a minimum number of paid leaves annually. Often, employees do not fully utilize these leaves, leading to an accumulation of unutilized leave balances. When employees retire or resign, the employer compensates them for these unused leaves, a practice known as leave encashment.
Types of Leaves:
Leave policies vary across companies, but certain common leave types exist:
- Casual Leave: Typically ranging from 7 to 10 days, these leaves are for personal reasons, with company encashment policies varying.
- Earned Leave or Privilege: Subject to prior notice, these leaves become eligible for encashment after a specific period, with policies differing among organizations.
- Medical Leaves: Granted for health-related reasons, the maximum limit varies from one firm to another.
- Holiday Leaves: Granted by employees without a deduction in salary, the maximum number of holiday leaves varies across companies.
- Maternity Leaves: Exclusive to female employees, these leaves range from 12 to 26 weeks during pregnancy and are not available for encashment.
- Sabbaticals: Employees can take leaves for upskilling, with the employer reimbursing these leaves during the course period.
Taxation of Leave Encashment:
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Leave Encashment During Service:
If an employee receives leave encashment while employed, the amount is fully taxable as part of ‘Income from Salary.’ Tax benefits can be claimed under Section 89 of the Income Tax Act by filling out Form 10E on the income tax portal.
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Leave Encashment at Retirement or Resignation:
- State and Central Government Employees: Fully tax-exempt.
- Non-Government Employees: Partially exempt and partially taxable based on calculations specified in Section 10(10AA)(ii).
- Legal Heir of a Deceased Employee: Fully tax-exempt.
Conclusion
Understanding leave encashment is crucial for employees seeking to maximize the financial benefits associated with their accrued leaves. As companies adopt diverse leave policies, individuals should know the tax implications, ensuring a well-informed approach towards leave utilization and encashment.
