The Least-of-Four Statutory Rule under Section 10(10AA)
When an employee resigns or retires from a non-government organization, leave encashment is exempt from income tax up to the lowest of the following four criteria:
- 1. Actual Amount Received: The gross leave salary paid out by the employer.
- 2. Statutory Government Limit: The notified lifetime ceiling of ₹25,00,000 (enhanced by CBDT from ₹3 Lakh).
- 3. 10 Months' Average Salary: Ten times the average monthly Basic Pay + DA drawn during the 10 months preceding retirement.
- 4. Cash Equivalent of Unavailed Leave: Value of leave balance calculated on the basis of a maximum of 30 days leave allowed per completed year of service.
Government vs Private Sector Taxation
Central and State Government employees enjoy 100% tax exemption on leave encashment received at the time of retirement, without any upper monetary threshold. For private sector and PSU employees, the exemption is governed strictly by the least-of-four rule.
Frequently Asked Questions
What if I encash leave while still working in the company?
Any leave encashment received during ongoing service is fully taxable in the hands of both government and non-government employees under "Income from Salaries" at normal slab rates.
Is the ₹25 Lakh exemption limit per employer or lifetime?
The ₹25,00,000 exemption limit is a cumulative lifetime limit. If you previously claimed ₹5 Lakh exemption during a past resignation, your remaining lifetime exemption under Section 10(10AA) is ₹20 Lakh.
Are fractions of service years counted for leave encashment?
No. Under income tax rules, only completed whole years of service are taken into account. For example, a service duration of 14 years and 11 months is counted as exactly 14 years.