Leave encashment for an employee, who is planning to retire depends on where he was employed. If he retires as a government employee then the amount that he gets by way of leave encashment as a government employee is completely exempt from tax.
Leave Encashment Tax in Case of A Non Government Employee
In case the employee is a non government employee who has retired then his leave encashment would be subject to taxes. The tax that would be applicable would be as follows and would be applied to the least of the following:
1) The amount that is encashed by the employee,m but which does not exceed 30 days for each year completed. There is also a cap of 10 months maximum that can be encashed. So, if the employee has 20 days leave and has completed only 14 years of service, then only 20 days will be taken into account.
2) 10 months of average salary that was paid just before retirement.
3) Rs 3 lakhs
4) Leave encashment that he has actually received.
Now for the purpose of payment of taxes the least of the above would be payable. It's important to note that government employees would not be liable to pay taxes.
It's best to take leave for a non government employee, rather then encash the same and pay taxes on it. This is unless, you do not pay taxes due to lower income or including the Sec 80C benefits the tax amount is almost negligible. In such cases you should not be bothered about leave encashment and the taxes to be paid on them.
What is Leave Encashment?
Leave encashment is nothing, but encashing your leave, which you have accumulated over the last few years. As mentioned earlier, if you have not encashed your leave, it's best to avail them. Some companies do not allow encashment of casual leave and only privilege leave can be encashed. Check with your company on the norms, before you decide on taking and availing on any kind of leave.