Leave encashment received at the time of retirement or superannuation is exempt from tax under Section 10(10AA). Budget 2023 significantly increased this exemption limit for non-government employees from ₹3 lakh to ₹25 lakh. This benefit is fully available under the New Regime.
Exemption Limits
- Central & State Government employees: Fully exempt — no cap
- Non-government employees: Least of (i) actual leave encashment received, (ii) 10 months' average salary, (iii) cash equivalent of leave balance (max 30 days per year of service), (iv) ₹25,00,000
- The ₹25 lakh limit was increased from ₹3 lakh in Budget 2023
- Applies only on retirement, superannuation, resignation, or death — NOT during service
During Service
- Leave encashment received while still in service is fully taxable
- Only leave encashment at the time of leaving employment is eligible for exemption
- Government employees can encash Earned Leave up to 300 days at retirement — fully exempt
This guide reflects FY 2025-26 (AY 2026-27) and is for general information. Tax rules and limits change, and how they apply depends on your circumstances. It is not professional tax advice; consult a qualified Chartered Accountant before acting.
