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CA Intermediate · Taxation · Salaries

Arvind retired from a private sector company and received Rs 3,60,000 as leave encashment at retirement. His average monthly salary for the 10 months preceding retirement was Rs 40,000. His unavailed leave credit at retirement was 240 days, which is within the permitted limit of 30 days for every year of service. He has received no leave encashment from earlier employers. What is the taxable leave encashment for tax year 2026-27?

Rs 40,000 is taxable. For a non-government employee, the exemption is the least of the ceiling, ten months' average salary, the cash equivalent of unavailed leave and the amount received. Leave of 240 days equals eight months, or Rs 3,20,000, which is least. Rs 3,60,000 less Rs 3,20,000 is taxable.

  1. ARs 40,000Correct
  2. BNil
  3. CRs 3,60,000
  4. DRs 1,20,000

Explanation

Exemption is the least of: statutory ceiling (Rs 25 lakh), 10 months' average salary (Rs 4,00,000), cash equivalent of unavailed leave (240/30 = 8 months x 40,000 = Rs 3,20,000), and the amount received (Rs 3,60,000). The least is Rs 3,20,000, so taxable = 3,60,000 - 3,20,000 = Rs 40,000. Treating the whole receipt as exempt is wrong.

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