The tax exemption on leave encashment has been increased to Rs 25 lakh for the private sector.
The government has decided to expand the scope of tax exemption on leave encashment for private sector employees.
The Union Budget 2023 presented by Finance Minister Nirmala Sitharaman includes some important pointers for people working in the private sector. One of the statements made by the minister which attracted attention was the scope of exemption of income tax on money received by way of leave encashment of salaried employees. The tax exemption limit for leave encashment has been increased more than eight times. After the announcement, the tax exemption has already been approved by the government, and implemented by the Income Tax Department.
The scope of tax exemption on leave encashment was already large for the government sector, while now it will be the same for private sector employees. Tax exemption on leave encashment has been increased from Rs 3 lakh to Rs 25 lakh. Tax experts feel that this is a positive step considering the current inflationary economy.
Every company has to pay earned leave or paid leave to its employees. If an employee has any leaves left after he retires or leaves the company, he is paid cash in lieu of the pending leaves. For those who don’t know, government employees already get a tax exemption of Rs 25 lakh on leave encashment, however, this exemption was not applicable to the private sector until now. During the budget speech 2023, the Finance Minister announced that now like government employees, the private sector will also be eligible for the same tax exemption on leave encashment up to 25 lakhs.
The labor law states that if an employee has paid leave arrears, he should be paid for the same. Meanwhile, the pending holidays of each month are carried forward. Later, the money is paid after an employee retires or leaves the company.
On the other hand, it is also to be noted here that if an employee takes paid leave money during his tenure in an organization, he will not be subjected to any tax exemption. This amount will be tax-free under section 10(10AA) of Income Tax.