Leave Encashment: Is Your ₹25L Exemption Claimed?

When you cash out unused paid leaves, the money is taxable — but there's a ₹25 lakh government exemption at retirement. Knowing the rules can save you lakhs in tax.

Here's what happened: The leave encashment tax exemption limit for non-government salaried employees was raised to ₹25 lakh in April 2023, up from the old ₹3 lakh limit.. Leave encashment received during active employment (not retirement or resignation) is fully taxable as salary income in the year you receive it.. Government employees enjoy 100% tax exemption on leave encashment at retirement with no upper limit — a benefit private sector workers do not get..

What you should do: Check your leave balance now — if you're nearing retirement, avoid encashing leaves during service to protect the ₹25 lakh tax-free limit.. Ask your HR or payroll team whether your leave encashment payout will be processed as 'during service' or 'at separation' — the tax treatment is very different.. File Form 10E on the Income Tax portal if you received a large lump-sum leave encashment to claim relief under Section 89(1) and reduce your tax burden..

If you resign mid-year and get leave encashment, you can still claim the ₹25L exemption — it's not restricted to retirement alone; it applies on separation from any employer.