Leave Encashment Tax 2026: ₹25 Lakh Exemption, Formula & Examples
Updated September 2026: Leave encashment tax treatment depends on whether it is received during service or at retirement/resignation and whether the employee is Government or non-Government. The current specified ceiling for eligible non-Government retirement/resignation exemption is ₹25 lakh, subject to the statutory calculation.
Tax treatment
| Situation | General treatment |
|---|---|
| During service | Generally taxable as salary |
| Eligible Government employee at retirement | Eligible amount fully exempt |
| Non-Government employee at retirement/resignation | Exemption limited by least-of-four calculation |
Non-Government exemption formula
The exempt amount is the least of actual leave encashment, eligible unutilised-leave cash equivalent, 10 months' prescribed average salary, or ₹25 lakh reduced by earlier exemption already claimed where applicable.
30-day restriction
For the exemption calculation, earned-leave entitlement is generally restricted to 30 days for each completed year of service even if the employer's HR policy is more generous.
Example
If actual receipt is ₹12 lakh, eligible leave value ₹10 lakh, 10-month average salary ₹9 lakh and the available monetary ceiling is ₹25 lakh, the least amount is ₹9 lakh. The remaining ₹3 lakh is taxable, subject to the final computation.
Payroll checklist
- Identify service vs retirement/resignation payment.
- Confirm Government/non-Government status.
- Obtain leave ledger and completed service years.
- Apply the 30-day rule.
- Calculate prescribed average salary.
- Check earlier exemption claims.
- Apply the least-of-four test and document it.
Frequently asked questions
Is ₹25 lakh available for every employer separately?
No. Earlier exemption claims can reduce the available overall ceiling.
Is leave encashment during service exempt?
Generally no; it is normally taxable as salary, though applicable relief provisions may separately be considered.
Is private-sector retirement leave encashment fully exempt?
No. The least-of-four calculation applies to eligible non-Government employees.
Can I use gross CTC as average salary?
No. Use the prescribed salary components for the statutory calculation.
Last reviewed: September 2026.
More Frequently Asked Questions
What should I know about Tax treatment?
Situation General treatment During service Generally taxable as salary Eligible Government employee at retirement Eligible amount fully exempt Non-Government employee at retirement/resignation Exemption limited by least-of-four calculation
What should I know about Non-Government exemption formula?
The exempt amount is the least of actual leave encashment, eligible unutilised-leave cash equivalent, 10 months' prescribed average salary, or ₹25 lakh reduced by earlier exemption already claimed where applicable.
What should I know about 30-day restriction?
For the exemption calculation, earned-leave entitlement is generally restricted to 30 days for each completed year of service even if the employer's HR policy is more generous.
What should I know about Example?
If actual receipt is ₹12 lakh, eligible leave value ₹10 lakh, 10-month average salary ₹9 lakh and the available monetary ceiling is ₹25 lakh, the least amount is ₹9 lakh. The remaining ₹3 lakh is taxable, subject to the final computation.
What should I know about Payroll checklist?
Identify service vs retirement/resignation payment. Confirm Government/non-Government status. Obtain leave ledger and completed service years. Apply the 30-day rule. Calculate prescribed average salary. Check earlier exemption claims. Apply the least-of-four test and document it.
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