The tax exemption limit for non-government (private sector) salaried employees on leave encashment has been raised from Rs 3 lakh to Rs 25 lakh, effective April 1, 2023. This modification is applicable for assessees under the new as well as the old tax regimes.
Leave Encashment Exemption
Under section 10(10AA)(ii) of the Income-tax Act of 1961, the exemption applies to leave encashment received by non-government/ private sector employees at the time of retirement, whether on superannuation or otherwise. However, the exempt amount cannot exceed Rs 25 lakh, minus any tax exemption allowed in the employee’s total income under section 10(10AA)(ii) in any previous year.
CBDT Notification 31/2023: Limit Enhanced
The CBDT has notified enhanced tax exemption limit in respect of leave encashment for non-government (private sector) salaried employees from Rs 3 lakh to Rs 25 lakh, effective from AY 2023-24, vide Income Tax Notification 31/2023 dated May 24, 2023. This amendment has been made in line with the proposal made in the Budget-2023 by the Finance Minister.
CBDT Income Tax Notification 31/2023 dated 24/05/2023: Leave Encashment Exemption Limit Enhanced for Private Sector Employees
Eligibility Conditions and Applicability
Private sector employees who are not covered by the leave encashment rules of the Central or State Governments, are eligible to avail the enhanced limit of exemption for leave encashment at the time of retirement, whether on superannuation or otherwise.
Maximum Exemption Limit
The total amount exempt from income tax under section 10(10AA)(ii) of the Income-tax Act, 1961, shall not exceed Rs 25 lakh if a non-government/ private sector employee receives such payments from more than one employer in the same previous year. Furthermore, the amount exempt from income tax shall not exceed the limit of 25 lakh, less the tax exemption already allowed in the employee’s total income under section 10(10AA)(ii) of any previous year or years.
Effect on Private Sector Salaried Employees
This increase in the exemption limit will benefit non-government (private sector) employees The exemption of Rs 25 lakh is redeemable for up to ten months’ average salary at the time of retirement. Such employees can claim partial or complete exemption based on the least amount of the following four factors:
i) Rs. 25 lakh (increased from Rs 3 lakh effective from April 1, 2023);
ii) Actual leave encashment amount;
iii) Average salary of the last 10 months; or
iv) Cash equivalent of the leave balance, subject to a maximum of 30 days per year of service.
Claiming Relief under Section 89 for Leave Encashment (Form 10E)
Leave encashment received during the employment is fully taxable and forms part of ‘Income from Salary’. However, employees can claim tax relief under Section 89, by filing Form 10E online on the income tax e-filing portal. Here’s a step-by-step guide to claiming tax relief for leave encashment:
i) Log in to your account on the Income Tax e-filing portal;
ii) Access Form 10E, which is mandatory for claiming relief under Section 89(1);
iii) Fill out the form with the required details, including information about your leave encashment; and
iv) Submit the form online.
You will receive a message displaying the transaction ID and acknowledgement receipt number upon successful submission.
In conclusion, the exemption limit of Rs 25 lakh is an aggregate exemption during the lifetime of an employee. One should keep in mind that leave policies and types of leaves differ from company to company and the tax treatment of leave encashment may vary accordingly.
As per explanatory statement given in the government gazette notificcation at the bottom, it is also effective for previous financial years, please deeply go through again and confirm. Otherwise there was no need to make statement in the bottom of gazette.
In my opinion, this comment is incorrect. The information on retrospective effect in the bottom of the notification refers to the implementation date being from 01/04/2023 whereas notification is issued on 24/05/2023. Nothing to do with previous financial years!
Under point 2, it is clearly mentioned that notification is effective from 01/04/2023. Then why there was need for explanatory memorandum in the bottom of gazette?
With effect from 1 April 2023 is generally understood as effective Assessment Year 2023-24, but still seeking this view being seconded.
Notifications issued by the CBDT are supposed to be effective from the specified date of the previous year (or say financial year), therefore in my opinion this enhanced limit is applicable from FY 2023-24 (AY 2024-25). However, what you have said would have been correct in case the amendment had been made via the Finance Act 2023 itself.