Leave Encashment Tax: Save Up to ₹25 Lakh?

When you retire or leave a job, any cash paid for unused leaves may be taxed. Private sector employees get a tax exemption up to ₹25 lakh, but the actual amount depends on your salary and leave balance. Government employees get full exemption.

Here's what happened: For AY 2026-27, private sector salaried employees can claim leave encashment tax exemption up to a maximum of ₹25 lakh over their entire working lifetime.. The exempt amount is calculated using a formula based on your average monthly salary and the number of earned leave days accumulated — so higher salary doesn't always mean maximum exemption.. Government employees (central and state) continue to enjoy 100% tax exemption on leave encashment with no upper monetary cap, a benefit private employees do not get..

What you should do: Check your HR or payslip to find out exactly how many earned leave days you have accumulated — this directly determines your exemption calculation.. Ask your employer's payroll or accounts team for a written leave encashment computation before you retire or resign, so you know the taxable portion in advance.. Report any leave encashment received under 'Income from Salary' in your ITR and claim the exemption correctly under Section 10(10AA) to avoid a tax notice..

Pro tip: If you have changed jobs before, the ₹25 lakh lifetime cap is cumulative — exemptions claimed at previous employers reduce what you can claim now, so keep past Form 16s handy.