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CA Intermediate · Taxation · Salaries

Meera retired from a private company where she had served 22 years. The company allows 30 days of earned leave per year of service. During service she availed 390 days of leave. On retirement she received leave encashment of Rs 4,20,000. Her average monthly salary (basic plus DA forming part of retirement benefits) for the 10 months before retirement was Rs 40,000. Treat a month as 30 days. What is the taxable leave encashment for tax year 2026-27?

Rs 60,000 is taxable. Earned leave credit is 660 days and 390 were availed, leaving 270 days, which is 9 months of salary or Rs 3,60,000. That is the least of the four exemption limits. Subtracting it from the Rs 4,20,000 received leaves Rs 60,000 taxable.

  1. ARs 60,000Correct
  2. BRs 20,000
  3. CRs 4,20,000
  4. DRs 0

Explanation

Leave credit = 22 x 30 = 660 days; balance = 660 - 390 = 270 days = 9 months, so cash equivalent = 9 x 40,000 = 3,60,000. Exemption is the least of 10 months' average salary (4,00,000), cash equivalent of leave balance (3,60,000), the amount received (4,20,000) and the Rs 25 lakh limit, so it is 3,60,000. Taxable = 4,20,000 - 3,60,000 = Rs 60,000. Using 4,00,000 as the exemption gives the wrong figure of Rs 20,000.

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