CBDT Increases Leave Encashment Exemption From Rs.3 Lakhs to Rs.25 Lakhs

The Central Board of Direct Taxes (CBDT) has issued Notification No. 31/2023 on May 24, 2023, announcing a significant change in the exemption limit for leave encashment under Section 10(10AA) of the Income-tax Act, 1961. Non-government employees receiving leave encashment on retirement will now enjoy an exemption limit of Rs. 25,00,000 (twenty-five lakhs rupees), effective from April 1, 2023. This update supersedes the previous exemption limit of Rs. 3,00,000.

The CBDT exercises its authority under Section 10(10AA)(ii) to notify this revised exemption limit, as mentioned in the Budget Speech earlier this year by the Finance Minister. The purpose of this notification is to provide relief to non-government employees by increasing the exemption limit and thereby reducing their tax liability on leave encashment received upon retirement.

The official document, titled CBDT Notification No. 31/2023/F. No. 200/3/2023-ITA-I, dated 24.05.2023, outlines the details of the new exemption limit. As per this notification, the Central Government specifies Rs. 25,00,000 as the maximum amount receivable by employees upon retirement as cash equivalent of leave salary for the period of earned leave credited to their account. This limit applies to employees covered under sub-clause (ii) of clause (10AA) of Section 10, irrespective of whether the retirement is due to superannuation or other reasons.

The CBDT notification takes into consideration the leave encashment amount received by non-government employees and ensures that they are exempted from tax liability up to Rs. 25,00,000. Any amount exceeding this limit will be subject to income tax as per the applicable tax rates.

It is important to note that the notification is retrospective in nature. It deems to have come into force on April 1, 2023, despite being issued on May 24, 2023. Therefore, the revised exemption limit of Rs. 25,00,000 will apply to leave encashment received by eligible employees from the beginning of the financial year 2023-2024.

This change in the exemption limit for leave encashment is a positive development for non-government employees, as it provides them with increased tax relief upon retirement. The higher limit of Rs. 25,00,000 allows individuals to retain a larger portion of their leave encashment amount without being subject to income tax.

Overall, the CBDT’s notification showcases the government’s efforts to address the needs of non-government employees and align the tax regulations with current economic realities. By raising the exemption limit, the authorities aim to reduce the tax burden on retiring individuals and support their financial well-being during this transitional period of their lives.

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