Good news for non-govt salaried employees: Income Tax exemption limit for leave encashment upon retirement hiked to Rs 25 lakh

The Ministry of Finance on Thursday announced an increase in the tax exemption limit for leave encashment upon retirement for private sector salaried employees to Rs 25 lakh. This is in line with Finance Minister Nirmala Sitharaman's Budget speech, where she announced that the tax exemption on leave encashment for non-government employees would be raised from Rs 3 lakh to Rs 25 lakh. The Rs 3-lakh limit had been fixed in 2002 when the highest basic pay in the government was Rs 30,000 per month.

With this announcement, the tax exemption on leave encashment of non-government salaried employees will rise for the period of earned leaves remaining at the time of their retirement in case of both superannuation and otherwise.  

The official communique stated that the increased limit for tax exemption on leave encashment on retirement or otherwise of non-government salaried employees to Rs 25 lakh has come into effect from April 1, 2023.

However, it has also been clarified that the aggregate amount exempt from income tax under the Act shall not exceed the Rs. 25 lakh limit. The limit particularly holds true for transactions done between a non-government employee from more than one employer in the same previous year. 

CBDT issues Notification No.31/2023 dt 24.05.2023 increasing limit for tax exemption on leave encashment for non-government salaried employees to Rs.25 lakh w.e.f. 01.04.2023.

For more details, please see the Press Release:https://t.co/OUHr07xTCZ pic.twitter.com/8T24BjCL23

— Income Tax India (@IncomeTaxIndia) May 25, 2023

“Further, the amount exempt from income tax under section 10(10AA)(ii) of the Act shall not exceed the limit of Rs. 25 lakhs as reduced by the tax exemption already allowed in the total income of the employee under section 10(10AA)(ii) of any previous year or years,” the Central Board of Direct Taxes (CBDT) said in a statement.

This move will benefit non-government employees as they can avail higher tax exemptions for leave encashment paid against accumulated leave balances over time.

 “The limit of Rs.3 lakh for tax exemption on leave encashment on the retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was Rs. 30,000/- pm. In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lakh,” FM Sitharaman mentioned during her budget.

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