Is leave encashment taxable?
Leave encashed while still in service is fully taxable as salary income, for every employee. Leave encashed at the time of retirement, resignation, or termination is treated differently: government employees get it fully tax-exempt, while private-sector employees get a partial exemption under section 19 of the Income-tax Act, 2025 (earlier 10(10AA)).
How is the private-sector exemption limit calculated?
The exempt amount is the least of four figures: the leave encashment amount actually received, the cash equivalent of leave balance (capped at 30 days per year of service, not modeled separately here), 10 months' average salary drawn in the 10 months before retirement or resignation, and a flat monetary cap. That cap was revised from ₹3,00,000 to ₹25,00,000 after Budget 2023, effective for encashments on or after 1 April 2023.
What counts as "salary" for this calculation?
Basic pay plus Dearness Allowance (DA) — not your full CTC or gross salary. Allowances, bonuses, and other perks are excluded from both the per-day pay calculation and the 10-month average used for the exemption cap.