Notification of Increased Cap on Non-Governmental Paid Employees’ Tax Exemption for Encashment of Leaves
Increased Cap on Non-Governmental Paid Employees’ Tax Exemption for Encashment of Leaves
The Hon’ble Finance Minister announced in the Budget Speech 2023 a rise in the tax exemption ceiling on leave encashment for salaried non-governmental employees. This hike was effective from April 1, 2023. It was earlier up to the limit of Rs. 3 lakhs under Section 10 (10AA) (ii) of the Income Tax Act, 1961, and the new maximum is Rs. 25 lakhs.
The amount exempted shall be at most Rs. 25 lakhs if a non-governmental employee receives it from more than one employer in the same previous year. Furthermore, the amount exempted shall not exceed Rs. 25 lakhs from the employee’s total income of any previous year.
What is Leave Encashment?
Leave encashment is the process of converting unused leave into cash. It is typically offered to employees who are leaving the organization or retiring. The amount of leave encashment is calculated based on the employee’s basic salary and the number of unused leave days.
Tax Implications of Leave Encashment
Prior to the Budget Speech 2023, leave encashment up to Rs. 3 lakhs was tax-free under Section 10 (10AA) (ii) of the Income Tax Act, 1961. Any amount received in excess of Rs. 3 lakhs was taxable as per the employee’s tax slab.
The Budget Speech 2023 increased the tax exemption limit on leave encashment to Rs. 25 lakhs. This is a significant increase that will benefit many salaried employees.
Benefits of the Increased Tax Exemption Limit
The increased tax exemption limit on leave encashment has several benefits for salaried employees:
Increased savings: Employees can now save more money on taxes when they encash their leave.
Improved financial planning: The increased exemption can help employees plan their finances better, especially during retirement.
Greater flexibility: Employees have more flexibility in deciding when to encash their leave.
Important Points to Remember
There are a few important points to remember about the increased tax exemption limit on leave encashment:
- The exemption is only available for salaried non-governmental employees.
- The maximum amount that can be exempted is Rs. 25 lakhs.
- The exemption is subject to the employee’s total income for the previous year.
Conclusion
The increased tax exemption limit on leave encashment is a welcome development for salaried employees. It will help them save more money on taxes and improve their financial planning. For additional information you can click here.