Retiring in 2026? Claim ₹25L Tax-Free Leave Pay

If you are retiring in 2026, any leave encashment you receive is tax-free up to ₹25 lakh. Knowing the rules before you file your ITR can save you lakhs in unnecessary tax payments.

Here's what happened: The government raised the tax-exempt leave encashment limit for non-government employees to ₹25 lakh in April 2023, up from just ₹3 lakh set in 1998.. Central and state government employees continue to enjoy full tax exemption on leave encashment with no upper cap at the time of retirement.. For private sector employees, the exemption is calculated using a formula based on last drawn salary and unused earned leave — the ₹25 lakh is the maximum ceiling, not a flat payout..

What you should do: Check your leave balance statement from HR before retirement to calculate how much earned leave you can encash and what falls within the ₹25 lakh exempt limit.. Collect Form 16 from your employer confirming the leave encashment amount and exemption claimed, and verify it matches what you report in your ITR under Section 10(10AA).. If you have changed jobs and received leave encashment from previous employers earlier, deduct those prior exempt amounts from your ₹25 lakh lifetime limit before claiming fresh exemption..

The ₹25 lakh exemption is a LIFETIME limit across all employers — not per job. If you claimed ₹8 lakh tax-free at a previous company, only ₹17 lakh remains exempt now.