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CA Intermediate · Taxation · Salaries

Ramesh, a non-government employee, is serving at Pune. During tax year 2026-27 his employer paid him Rs 84,000 as encashment of earned leave while he was still in service and continued to employ him. Which statement correctly describes the tax treatment of this receipt?

The whole Rs 84,000 is taxable as salary. The exemption for leave encashment applies only when it is received on retirement or superannuation. Encashment while the employee is still in service is treated as ordinary salary income, so no part of it is exempt under the head Salaries.

  1. AThe full Rs 84,000 is exempt because it is leave encashment
  2. BThe full Rs 84,000 is taxable as salaryCorrect
  3. CRs 84,000 is taxable only to the extent it exceeds 10 months' average salary
  4. DRs 84,000 is taxable under Income from Other Sources

Explanation

Leave encashment is exempt only when received at retirement or superannuation (or on leaving the job). Encashment during continuing service is a normal salary receipt and is fully taxable under the head Salaries. The 10-month limit applies only to encashment at retirement, so option C is wrong.

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