How is leave encashment taxed?

For government employees it is fully exempt under Section 10(10AA)(i). For everyone else, the exemption on retirement or resignation is the least of four amounts: the actual encashment received; ₹25,00,000; 10 months' average salary; and the cash value of unavailed leave counted at a maximum of 30 days for each completed year of service. The excess is taxed as salary. Encashment while still in service is fully taxable.

What is the ₹25 lakh limit?

The lifetime exemption ceiling for non-government employees, raised from ₹3 lakh to ₹25 lakh with effect from 1 April 2023. It is cumulative across all employers over your career, so exemption already claimed on a previous job reduces what is available now.

Average of basic plus dearness allowance forming part of retirement benefits, plus commission as a fixed percentage of turnover, for the 10 months immediately before leaving. HRA, bonus and other allowances are excluded, which is why the exemption is often smaller than people expect.

How does the 30-days-a-year rule work?

The law allows at most 30 days of leave per completed year of service to count toward the exemption, regardless of how much leave the employer actually credits. So 20 years of service caps the countable leave at 600 days, less whatever was already taken. The cash value is that leave balance × average daily salary (monthly salary ÷ 30).

Is leave encashment under the new tax regime exempt?

Yes. Section 10(10AA) is not among the exemptions withdrawn under Section 115BAC, so the same exemption applies under both regimes.

Leave Encashment Exemption Calculator

How much of the leave encashed at retirement or resignation is tax-free under Section 10(10AA).

Switch tool

Employer

Least of four amounts is exempt.

Leave encashment received (₹)

₹

Average monthly salary, last 10 months (₹)

₹

Completed years

Leave already taken (days)

Exemption claimed from earlier employers (₹)

₹

The ₹25 lakh limit is a lifetime total across all jobs.

Exemption

(a) Received

₹ 0

(b) Statutory limit₹25L less prior claims

₹ 25,00,000

₹ 0

(d) Unavailed leave0 days × daily salary

₹ 0

Exemptleast of a–d

₹ 0

Taxable leave encashment

₹ 0

Indicative only. Section 10(10AA). Applies to encashment on leaving employment; encashment during service is fully taxable. The ₹25 lakh ceiling is cumulative across employers.

How it works

Four amounts

Actual received, ₹25 lakh, 10 months' salary, and the cash value of unavailed leave at 30 days a year.

Salary base

Average basic plus DA for the 10 months before leaving. Allowances excluded.

The rest is salary

Anything above the least of the four is taxed at slab rate in the year received.

Work out the exempt portion before the final settlement

Leave encashment is often the largest single item in a full-and-final, and the exemption is routinely overstated because HRA is counted in salary or leave is counted above 30 days a year. Enter the amount, the 10-month average salary, service years and leave already taken, and the calculator shows all four legs, which one binds, and the taxable balance.

₹25 lakh lifetime limit

Reduced by exemption already claimed from previous employers.

30 days a year

Leave beyond this per year of service does not count, even if the employer credits more.

Basic + DA only

The single most common source of over-claimed exemption.

Both regimes

10(10AA) survives the switch to the new regime.