Tax Liability and Exemptions after retirement/superannuation

On the matter of tax exemption or liability after retirement / superannuation let us have a look at the basic provision related to tax-ability of leave salary. Leave salary, also known as leave encashment, means that employee will receive the cash for leaves which are not taken by the employees. The leave encashment received during the service period is taxable for all the employees as per the income tax slab applicable to the employee. However, the tax treatment is different for the leave encashment received at the time of retirement/ superannuation. Further, the tax treatment is different for Government employee (Central or State) vis a vis Non -Government employee as under:

In the case of Central/ State Government employee, any amount received as cash equivalent of leave salary in respect of period of earned leave at his credit at the time of retirement/ superannuation is fully exempt from tax u/s 10(10AA)(i).
In the case of Non-Government employee (i.e., the employee other than an employee of the Central Government or a State Government) leave salary is exempt from the tax u/s 10(10AA) (ii) to the extent of the least of the following:

1. Cash equivalent of the leave salary in respect of the period of earned leave to the credit of an employee only at the time of retirement whether on superannuation or otherwise (earned leave entitlement cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired): or
2. 10 month Average Salary or
3. The amount not chargeable to tax as specified by the Government. (Presently, Rs. 3 Lacs has been specified).
4. Leave encashment actually received at the time of retirement.

Average salary, as mentioned above, is to be calculated on the basis of average salary during the period of 10 months immediately preceding the retirement/ superannuation.
Salary here means basic salary & includes dearness allowances if term of employment so provided. It also includes commission based on a fixed percentage of turnover achieved by an employee as per term of contract of employment but excludes all other allowances & perquisites.

Now, with above basic brief up about taxability of leave salary, the opinions on the issue raised in your queries are as under:

1. Leave salary received at the time of retirement is exempt only in the hands of State or Central Government employee. It will not be exempt in the hands of the employee of PSU or Local Authorities. The definition of Government Employee is not specifically given in the Income Tax Act-1961. However, the Act has specifically incorporated the PSU employees, Government undertaking employee, Local Authorities employees etc in various other Sections / clauses in the Income Tax Act-1961 where the benefit is meant to be conferred to them. The same is not there in Section 10(10AA).

2. The Leave Salary is taxable under the head Income from Salary. The Salary Income is taxable in the year in which it has accrued or in the year in which it is received, whichever is earlier. Accordingly, the leave encashment is taxable as income of the FY 2012-13 and not FY 2013-14.

TAXABILITY OF LEAVE SALARY AT A GLANCE:

S.No.

Particulars Tax Treatment

A]

Encashment of leave during service It is charged to tax.

B]

Encashment of leave at the time of retirement
1. If Central or State Government Employees Fully exempt from tax u/s 10(10AA)(i)
2. For any other employees Lease of the following is exempt:
1. Earned leave months x Average salary

2. Avg. monthly salary x 10

3. Maximum amount Rs. 3,00,000/-

4. Actually received

 

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12 thoughts on “Tax Liability and Exemptions after retirement/superannuation

  1. K.L.juneja

    I resigned from central Govt service in 1986 and got encashment of leave to the extent of 50 percent of the total leave on credit. Lateron I opted to got this service counted in my present employment in autonomous body.Now Iam going to superanuate in February,2014
    I have 291 days E.L on my credit. Kindly let me know whether the leave encashment taken in my previous office i.e 50 per cent say 57 days is taxable or not

    Reply
  2. K.L.juneja

    I resigned from central Govt service in 1986 and got encashment of leave to the extent of 50 percent of the total leave on credit. Lateron I opted to got this service counted in my present employment in autonomous body.Now Iam going to superanuate in February,2014
    I have 291 days E.L on my credit. Kindly let me know whether the leave encashment taken in my previous office i.e 50 per cent say 57 days is taxable or not

    Reply
  3. D. K. Patel

    I am working with Bank Of India( a government of India undertaking) as an officer. I will be retiring on 31.05.2014. my average salary is Rs 70000/- pm.
    I will be getting leave encashment of 240 days amounting Rs. 6.00 lacx approximately.What will be exempted amount of Income tax on that.

    Reply
    1. MKN SHAREEF

      Whether the leave salary encashment amount at the time of suprannuation retirement from Andhra Pradesh State Government Undertaking is taxable under income tax act. Kindly clarify

      Reply
  4. Shailesh Prabhu

    Dear Sir,
    It is an injustice to private sector employees that their retirement leave encashment is liable to tax under sec 10 (10AA)i whereas the Government employees get it free under sec 10(10AA)ii.
    Representation must be made to the Government to rectify this anomaly and forums such as yours need to take the initiative with the Finance Minister to rectify this injustice.
    Such an anomaly between Government and private employees also existed earlier for Gratuity proceeds which was subsequently corrected. Thanking you for your leading the way on this. – best regards,

    Reply
  5. Shweta

    I am a director of a pvt ltd firm. one of our employees retired on 30th September 2014. After that he has been re-appointed on an annual contract at a fixed monthly salary with no other benefits . At the time of his retirement the company notified the PF department about the same. Is he now entitled to PF and ESI ?

    Reply
  6. Ashwani

    I was an emoloyee of a PSU. We had encashment of two types of leave at time of retirement. 1. Earned leave – Maxm encashable leave = 300. Half Pay Leave – Maxm encashable 300. In my case, due to actual availaibilty of actual accumulated leave, I received encashment for 9 days of Earned Leave and 90 days for Half Pay Leave. The amount received was Rs.48000 for Earned Leave and Rs. 260000 for Half Pay Leave. Total Rs.308000. I was given I.T. exemption for only Rs. 48000 that is the Earned Leave while no exemption was given to me on the amount 260000 and it was fully taxed on the plea that I.T. act specifies exemption only for Earned Leave. My plea is that the Earned leave and Half Pay Leave as named by our PSU are both to be treated as Earned Leaves under I.T. act and exemption of Rs.300000 has to allowed. Because both the leaves fall under the catagory of Leave Salary. Other leaves like Casual Leave are not earned leave while Earned Leave and Half Pay Leave are earned by the employees on the basis of working days in the year. Please advise on the matter.

    Reply
    1. prahlad

      I think you should get the exemption under section 10(10AA) as earned leave means leaves which can be earned as HPL is also earned at the time of retirement. You should take up with the department.

      Reply
  7. Venugopalan T

    What is the exemption available for a State University Employee on superannuation retirement, under IT Act. Is it different from that of a State Government employee.

    Reply
  8. SAJITHA T K

    I am going to retire from a state University in Kerala in next April. The retirement benefits such as DCRG, Pension commutation and Leave encashment are alike Kerala state Government pattern. Please clarify whether these retirement benefits are taxable as per IT Act. If there is any court verdict against collection of IT from retired employees, Please mention the details.

    Reply

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