CA Intermediate · Taxation · Salaries
Ms. Kavita, a non-government employee, retires in tax year 2026-27 and receives ₹7,50,000 as leave encashment on retirement. Her average monthly salary for the 10 months preceding retirement was ₹60,000, and the cash equivalent of her unavailed leave balance at retirement, as per employer rules and the permissible limit, is ₹8,00,000. She had not claimed any earlier exemption for leave encashment. What is the taxable portion of the leave encashment?
The taxable leave encashment is ₹1,50,000. The exemption is the least of the amount received, ten months' average salary, the cash equivalent of leave balance and ₹25 lakh, which is ₹6,00,000. Subtracting this from ₹7,50,000 received leaves ₹1,50,000 taxable.
- A₹1,50,000Correct
- BNil
- C₹7,50,000
- D₹2,00,000
Explanation
Exempt leave encashment on retirement is the least of: (a) amount received ₹7,50,000, (b) 10 months' average salary ₹6,00,000, (c) cash equivalent of leave balance ₹8,00,000, (d) the statutory limit of ₹25 lakh. The least is ₹6,00,000. Taxable = 7,50,000 - 6,00,000 = ₹1,50,000. Option ₹2,00,000 wrongly deducts the 10-month figure from the leave balance rather than from the amount received.
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