This term has become quite common now. It's also generally used because it's something that every working person wants to know about. But what exactly is it? It is even calculated with a simple formula. There are also various advantages as well. In this post, we will understand everything about leave encashment.
This is going to be an excellent read, so stick around and read about the leave encashment to the conclusion. So, without further ado, let's get started.
What is Leave Encashment?
As we already know now from the intro part, leave encashment is quite a common term among working professionals. This concept implies that even your leaves could bring you some money.
Leave encashment basically means that a sum of money is received by you as an employee in exchange for a period of leave that is not taken by you.
When you are ready to retire, your service is being extended, or you depart from your job, you can cash in your accumulated leave.
The policy of leave encashment may vary from one employer to another. There are some employers who pay for the unavailed leaves in the next calendar year.
Few of them carry over the remaining balance in the same year or the following year.
In such cases, the employer pays for the unavailability of leaves when you leave the job.
If we talk about the income tax treatment of the amount that you can get towards leave encashment, then it depends on the employment type that you have, such as-
Time of-in service
Time of Retirement
Concept of Leave Encashment
According to labor legislation, every employee or salaried person is allowed a certain number of paid days off each year. Although it is not critical that an employee use all of his annual leave entitlement.
In reality, most firms give people the opportunity to roll over unutilized paid leave.
This could eventually result in the worker receiving an accrued unutilized leave balance upon retirement or dismissal from the organization.
This requires the company to compensate employees for unused paid administrative leave.
This is known as leave encashment.
Now that we've covered the fundamentals of leave encashment, let's have a look at how it's handled in the beneficiary's hands.
Taxation of Leave Encashment
Let us now consider the word "leave encashment taxation."
Service-related leave encashment
Aggregated leave can be redeemed both during employment and upon notice or resignation. Any leave taken while working is fully taxable and is included in 'income from Salary.' Section 89 compensation, on the other hand, is available.
Encashable leave at the time of termination or departure
Leave encashment granted at the point of maturity or departure appears to be completely or partially exempted depending on the owner's categorization. This has been examined in greater detail below:
The monetary portion of a State or Central Administration employee's leave at the time of retirement or departure is completely exempt.
Legal heirs of deceased employees who receive leave encashment are completely exempt.
Non-government employees' leave encashment is exempt based on the formula established in Section 10(10AA)(ii), and any surplus sum is taxed as 'earnings from pay.'
Benefits of leave encashment
There are various benefits of leave encashments. Let’s take a look at some of them
If the earnings for leave encashment are received while the employee is still on the work, they are charged.
If you leave a job owing to dismissal or retirement, whether in the private or public sector, the money received for leave encashment is completely payable in your hands.
The value or amount created for leave encashment is recognized as earnings and is paid proportionately at the exact tax slab rate applicable to the worker under income tax legislation.
The sum received for leave encashment at the time of departing is tax-free for governmental (state and central) officers.
Example of Leave Encashment-
Here’s an example of leave encashment-
Suppose you receive Rs 5 lakh on retiring as a leave encashment.
The total of your salary (basic + DA + commission) in the 10 months leading up to your retirement is Rs 40,000 per month, for a total of Rs 4 lakh. In this case, the highest relief available is Rs 3 lakh (sanctioned limit). As a result, Rs 2 lakh (Rs 5 lakh – Rs 3 lakh) would be added to your earnings and be taxable.
Leave encashment paid to a deceased owner's lawful heirs is not refundable.
Assume a worker received leave encashment for one or more years and made use of any exceptions. In this case, the Rs 3 lakh restriction will be reduced by the amount of release obtained previously.
Staff members who quit or leave might seek an exemption for the money received for encashment of their absences. The predicted exclusion total would be reduced by that proportion.
It is now time to summarize our topic of what is leave encashment. The preceding information is all about leave encashment, with a simple and best illustration. Remember to like, comment, and share this enjoyable read with your family and friends. For more such blogs, Click Here.