Leave Encashment (Calculation & Taxation)

Leave Encashment (Calculation & Taxation)

Every salaried person as per labour law of that particular state in India is entitled to a minimum number of paid leave every year; there are organizations that provide more earned leave than the capped.

However, it is not necessary that an individual employee utilises all the leave he is entitled for a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves.

Some Organizations cap the Carry forward and remaining leaves are encashed during the service, whereas some organizations do not put any capping, which leaves the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.

Leave Encashment during service

Leave encashed during service is fully taxable and forms part of ‘income from Salary’.  Hence, basis the tax slab you are into, Encashment will be taxed. However, it depends on the organization, whether they tax it and deduct in the same month or it is distributed equally in remaining months.

Leave Encashment during retirement or leaving the organization

Leave encashment received at the time of retirement or leaving the organization is either fully or partially taxable depending upon the category that an employee falls under.

Leave encashment received by Central or State Government employee at the time of retirement or resignation is not taxable.

Leave encashment received by legal heirs of deceased employee is not taxable.

Least of the following is exempt for Non-Government employee based on Section 10(10AA)(ii) and balance amount if any is taxable as ‘income from salary’.

  1. Leave Encashment Amount Received
  2. Average Salary of Last 10 Months
  3. Salary Per Day * Unutilised Leave of Maximum 30 Days for every completed years of Service
  4. Amount notified by the Government (Rs. 3,00,000)

Leave Travel Allowance (2)

Leave Travel Allowance (2)

This is the 2nd LTA Blog, here is the link for 1st LTA Blog : https://www.crafthr.in/2020/05/10/leave-travel-allowance/

LTA exemption cannot be claimed at the time of ITR filing, the exemption is limited to LTA provided by the employer.

LTA exemption is available only for travel and not for Boarding, Lodging, local conveyance, sightseeing, food, etc.

Carryover of Unclaimed LTA

Some Employers also allow the unclaimed LTA amount to be carried over to next Financial Year, whereas some employers pay back the unclaimed LTA amount as taxable component, in same financial year, either at the year-end or on monthly basis.

Carryover of Journeys Exemption to next Year

In case if any employee has not availed 1 or 2 journey in any block year, he/she is allowed to carryover such exemption to the 1st calendar year of the next block year

LTA in case of Air Travel, Train, Taxi Etc

In case of your source and destinations are not connected by any recognized public transport – it will be presumed that the journey had been performed by rail and the exemption amount cannot exceed the amount equivalent to the AC 1st Class rail fare for shortest route

In case of your source and destination are not connected by rail but by other recognized public transport – Exemption amount is restricted to 1st class or deluxe class fare for the shortest route

In case of your source and destination are connected by rail – exemption amount cannot exceed the amount equivalent to the AC 1st Class rail fare for shortest route

In case of journey from source to destination is performed by Air – exemption amount is restricted to the Economy fair of Indian Airlines or Air India for the shortest route

Multi Destination Journey

In case of Multi Destination Journey, exemption is always considered for the shortest route from source to destination (Place of origin to the farthest place).

LTA Exemption on Holidays

As per IT Act 1961, LTA exemption cannot be availed for the journey performed during Holidays and some organizations do follow the rules strictly and reject the claims.

Leave Travel Allowance (2)

Leave Travel Allowance

There are many Allowances as per Income Tax Act 1961, which reduces your taxable income and eventually it lowers your Tax burden.

One of that is “Leave Travel Allowance”, which helps reduce the tax burden; in case you are travelling within India, it is also named as Leave Travel Concession. LTA exemption is also available for LTA received from former employer w.r.t travel after the retirement of service or termination of service.

It is exempted as per Section 10 (5). There are following conditions to be met, to claim this exemption:

  1. Travel has to be within India, only Domestic Travel
  2. EL/PL to be availed to Travel
  3. LTA Exemption can be claimed, only after your Travel has occurred. Not before the Travel Date.
  4. Employee can travel alone or with his family, where ‘family’ means the employee’s spouse, children and wholly or mainly dependent parents, brothers, and sisters of the employee.

As per the IT Act, 1961, there is no upper capping for the LTA. However, the organizations define the eligible capping as per their internal policy, basis the designation or bands. However, it cannot exceed the Actual Travel cost.

*LTA Exemption can be claimed only for 2 Journeys in a block of 4 years. Current block year is 2018-21.

In my Next blog on LTA, we will cover the following Topics:

Carryover of Unclaimed LTA

Carryover of Journeys Exemption to next Year

LTA in case of Air Travel, Train, Taxi Etc

Multi Destination Journey

LTA Exemption on Holidays