Converting unused earned leave into a cash payout, either during employment or at the time of separation.
Leave Encashment is the process of converting unused earned or privilege leave into a cash payment, calculated based on the employee's current Basic Salary. Companies typically allow encashment either once a year for leave beyond a certain balance, or fully at the time of resignation or retirement.
Tax treatment differs by situation — leave encashed during employment is fully taxable, while leave encashed at retirement is exempt under Section 10(10AA). For non-government employees this exemption is capped at ₹25 lakh (raised from ₹3 lakh via CBDT Notification No. 31/2023, effective for retirements on or after 1 April 2023, and applicable under both tax regimes); government employees are fully exempt with no cap.
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