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CA Intermediate · Taxation · Salaries

Sunita Rao retired from a private company after 25 years of service. At retirement she received ₹4,50,000 as leave encashment for 300 days of unavailed leave. Her average monthly salary for the 10 months before retirement was ₹40,000. The employer allows 30 days of leave per year of service, and she had availed 480 days of leave during her service. Assuming a month of 30 days, what part of the leave encashment is taxable in tax year 2026-27?

₹90,000 is taxable. The exemption is the least of the amount received, ten months' average salary, the ₹25 lakh ceiling, and the cash equivalent of leave earned at 30 days per year less leave availed. That last limit is 270 days, or ₹3,60,000, so ₹4,50,000 less ₹3,60,000 is taxable.

  1. A₹50,000
  2. B₹90,000Correct
  3. CNil
  4. D₹1,50,000

Explanation

The exemption is the least of four amounts. (a) The amount actually received is ₹4,50,000. (b) 10 months' average salary is ₹4,00,000. (c) The statutory ceiling is ₹25 lakh. (d) The cash equivalent of leave earned but not availed is limited to 30 days a year: 25 × 30 = 750 days, less 480 availed, gives 270 days, so 270/30 × ₹40,000 = ₹3,60,000. The exemption is ₹3,60,000 and the taxable part is ₹4,50,000 − ₹3,60,000 = ₹90,000. The figure ₹50,000 ignores the 30-days-per-year limit.

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