Leave Encashment — Rules and Tax Exemption under Section 10(10AA)
Leave encashment is payment for unused earned leaves at resignation or retirement. The tax treatment differs significantly between government and private sector employees.
Formula
Leave Encashment = (Monthly Basic Salary ÷ 26) × Number of Leaves. The divisor 26 represents standard working days per month.
Tax Exemption — Private Sector
Exempt amount = minimum of: (a) actual encashment, (b) 10 months average salary, (c) 30 days × years of service at daily rate, (d) ₹25 lakh lifetime limit. Government employees get full exemption at retirement.
Worked Example
Neha resigns after 8 years with 45 days pending leave and ₹60,000 basic. Encashment = (60,000÷26)×45 = ₹1,03,846. Max under rule (c) = 30×8 = 240 days, but she has only 45. Exemption = ₹1,03,846 — fully tax-free since it's below all limits.
Is leave encashment taxable at resignation? +
For private sector: partially exempt under Section 10(10AA)(ii) — minimum of 4 conditions. For government: taxable at resignation but fully exempt at retirement.
What is the maximum tax-free leave encashment? +
₹25 lakh lifetime limit for private sector employees (enhanced from ₹3 lakh earlier). This is cumulative across all employers in your career.
🔄 Last Updated: July 2026 · FY 2025-26