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)

Did you know????? (2)

Did you know????? (2)

  • An employee who has become a member of the Provident Fund on or after 1 September 2014 and draws monthly pay exceeding INR 15,000 is not eligible to become member of the EPS. In such case, the employer’s contribution is fully allocated to the EPF.
  • Notice Period recovery is non-taxable, it means if the Notice period is recovered under deduction after gross Salary being taxed in Full at the time of Full and Final Settlement, you are actually paying Tax on Notice Period recovery or the Amount, which you never received.
  •  Any Employer employing 10 or more employees has to display the following Abstracts (8):
  1. Sexual Harassment of women at workplace with Anti Sexual Harassment Policy with space for the name, addresses, e-mail, mobile no of the members of the Internal Complaint Committee
  2.  Payment of Wages (As Amended)
  3. Factories Act (As Amended)
  4. Maternity Benefit Act (As Amended)
  5. Contract Labour (R&A) Act (As Amended)
  6. Child and Adolescent Labour (P&R) Act with Child Labour (P&R) Amendment Act (As Amended)
  7. Checklist of Statutory Compliance under Labour Laws (As Amended)
  8. Payment of Gratuity Act Containing Amendment of 2018
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.

Did you know????? (2)

Did you know the followings about Offer / Appointment Letter?

If an appointment letter provides Gratuity in the monthly CTC (Cost to the Company), an employee can claim gratuity even when he has not completed 5 years of service.

Unless in Appointment Letter details are provided about probation period, he/she will be treated as regular employees.

When an appointment letter does not provide about the retirement age, such employee can continue to work as long as he is physically and mentally fit to work.

If there is no condition in the Appointment Letter about transfer of an employee from one place to another, such an employee cannot be transferred.

In the absence of any condition in the appointment letter about quantum suspension allowance, such a suspended employee will be entitled to full wages during his suspension.

In the Appointment letter, if there is no such condition that an employee can be transferred to any other office or branch or unit, such employee cannot be legally transferred to any branch or unit, which has been set up after the employee has been conducted in the employment.

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

Understanding Your Earnings & Deductions:

A. Basic

Basic is a fixed component in your Salary and forms the basis of other portions of your CTC. It is usually a large portion of your total salary. As per Industry Standard – it’s about 40-60% of your CTC.

B. House Rent Allowance

Salaried individuals, who live in a rented house/apartment, can claim house rent allowance or HRA to lower tax outgo. This can be partially or completely exempt from taxes. The income tax laws have prescribed a method for computing the HRA that can be claimed as an exemption.

The deduction available is the least of the following amounts:

a. Actual HRA received;

b. 50% of [basic salary + DA] for those living in metro cities (40% for non-metros); or

c. Actual rent paid less 10% of basic salary + DA

C. Leave Travel Allowance

Salaried employees can avail exemption for a trip within India under LTA. The exemption is only for the shortest distance on a trip. This allowance can only be claimed for a trip taken with your spouse, children, and parents, but not with other relatives. This particular exemption is up to the actual expenses, therefore unless you actually take the trip and incur these expenses, you cannot claim it. Submit the bills to your employer to claim this exemption.

An LTA exemption is available for only two journeys performed in a block of four calendar years.

D. Bonus

The bonus is usually paid once or twice a year. Bonus, performance incentive, whatever may be its name, is 100% taxable. Performance bonus is usually linked to your appraisal ratings or your performance during a period and is based on the company policy.

E. Employee Contribution to Provident Fund (PF)

Provident Fund or PF is a social security initiative by the Government of India. Both employer and employee contribute a 12% equivalent of the employee’s basic salary every month toward employee’s pension and provident fund. This is a retirement benefit that companies with over 20 employees must provide as per the EPF Act, 1952.

F. Standard Deduction

Standard Deduction has been reintroduced in the 2018 budget. This deduction has replaced the conveyance allowance and medical allowance. The employee can now claim a flat Rs. 50,000 (Prior to Budget 2019, it was Rs. 40,000) deduction from the total income, thereby reducing the tax outgo.

G. Professional Tax

Professional tax or tax on employment is a tax levied by a state, just like income tax which is levied by the central government. The maximum amount of professional tax that can be levied by a state is Rs 2,500. It is usually deducted by the employer and deposited with the state government. In your income tax return, professional tax is allowed as a deduction from your salary income.

H. Income Tax

TDS is tax deducted at source. Your employer deducts a portion of your salary every month and pays it to the Income Tax Department on your behalf. Based on your total salary for the whole year and your investments in tax-saving products, your employer determines how much TDS has to be deducted from your salary each month.

For a salaried employee, TDS forms a major portion of an employee’s income tax payment. Your employer will provide you with a TDS certificate called Form 16 typically around June or July showing you how much tax was deducted each month.

I. ESI

ESI stands for Employee State Insurance managed by the Employee State Insurance Corporation which is an autonomous body created by the law under the Ministry of Labour and Employment, Government of India. This scheme is started for Indian workers. The workers are provided with a huge variety of medical, monetary and other benefits from the employer. Any Company having more than 10 employees (in some states it is 20 employees) who have a maximum salary of Rs. 15000/- has to mandatorily register itself with the ESIC.

Employee’s contribution rate (w.e.f. 01.07. 2019) is 0.75% of the wages and that of employer’s is 3.25% of the wages paid/payable. Employees in receipt of a daily average wage upto Rs. 137/- are exempted from payment of contribution.

J. Labour Welfare Fund

Labour welfare fund is a statutory contribution managed by individual state authorities. It is an aid in the form of money or necessities for those in need. It provides facilities to labourers in order to improve their working conditions, provide social security, and raise their standard of living.

The state labour welfare board determines the amount and frequency of the contribution. The contribution and periodicity of remittance differs with every state.