Leave encashment tax: fully tax-free for government staff, up to ₹25 lakh for private employees — the 4-way formula with a worked example (Income-tax Act 2025)
Government employees (Central or State) pay no tax on leave encashment received at retirement. Private-sector and PSU employees get an exemption equal to the lowest of four amounts: (1) earned leave at credit (max 30 days per year of service) × average salary, (2) 10 × average monthly salary, (3) ₹25 lakh (limit notified from 1 April 2023), and (4) the actual amount received. “Salary” = basic + DA (if DA counts for retirement benefits), averaged over the last 10 months. The ₹25 lakh is a lifetime limit across all employers. Leave encashed while still in service is fully taxable. The exemption is available in both the new and old regimes. Under the Income-tax Act, 2025 it is section 19 (Table Sl. No. 13–14), earlier section 10(10AA).
Key facts Last verified: 15 Oct 2026
| Item | Details | Source |
|---|---|---|
| Government employees | Leave encashment at retirement (superannuation or otherwise) — entire amount exempt | Income-tax Act, 2025 — section 19, Table Sl. No. 13 |
| Other employees | Least of: leave at credit (≤30 days/year of service) × salary; 10 × average monthly salary (last 10 months); notified limit; actual received | Income-tax Act, 2025 — section 19, Table Sl. No. 14 |
| Notified limit | ₹25 lakh from 1 Apr 2023 (was ₹3 lakh); Notification 31/2023 | PIB — CBDT, 25 May 2023 |
| Lifetime / multiple employers | Aggregate limit ₹25 lakh, reduced by exemption already allowed in earlier years | Income-tax Act, 2025 — section 19(2)(f); PIB 25 May 2023 |
| “Salary” for this | Includes DA if the terms of employment so provide; excludes other allowances and perquisites | Income-tax Act, 2025 — section 19(2)(b) |
| New regime | Leave encashment exemption is not among the items blocked under the new regime (section 202(2)) | Income-tax Act, 2025 — section 202 |
Sunita retired from a private bank in Nagpur after 25 years with 240 days of earned leave at her credit and received ₹12 lakh as leave encashment. Her basic + DA for the last 10 months averaged ₹60,000 a month. Is it tax-free? Let’s apply the formula.
The 4-way formula (private and PSU employees)
Your exemption is the lowest of:
| # | Amount | How to work it out |
|---|---|---|
| 1 | Leave at credit × average salary | Earned leave at credit on retirement, counting at most 30 days for each year of service, × average daily salary |
| 2 | 10 months’ average salary | Average monthly salary of the last 10 months × 10 |
| 3 | ₹25,00,000 | Limit notified by the Central Government (lifetime) |
| 4 | Actual leave encashment received | From your final settlement |
Salary here = basic pay + DA (DA only if your employment terms count it for retirement benefits). Other allowances and perquisites are excluded. It is the average over the 10 months just before retirement.
Worked example: Sunita
| Step | Working | Amount |
|---|---|---|
| Average monthly salary (basic + DA, last 10 months) | — | ₹60,000 |
| 1. Leave at credit | 240 days is within the 30-days-per-year cap (25 × 30 = 750); 240 ÷ 30 = 8 months × ₹60,000 | ₹4,80,000 |
| 2. Ten months’ salary | 10 × ₹60,000 | ₹6,00,000 |
| 3. Notified limit | — | ₹25,00,000 |
| 4. Actually received | — | ₹12,00,000 |
| Exempt (lowest) | ₹4,80,000 | |
| Taxable as salary | ₹12,00,000 − ₹4,80,000 | ₹7,20,000 |
This is our worked example using the statutory formula; leave days are converted to months at 30 days. Your employer applies the same calculation in Form 16.
Why the ₹12 lakh wasn’t fully exempt even though it’s below ₹25 lakh: the ₹25 lakh is only a ceiling. Most people’s exemption is decided by limit 1 or 2 — the leave actually at credit, or 10 months’ salary.
Who gets what
| Situation | Tax treatment |
|---|---|
| Central / State Government employee, at retirement | Fully exempt |
| Private / PSU / bank employee, at retirement or when leaving the job | Exempt up to the lowest of the 4 amounts (max ₹25 lakh in a lifetime) |
| Leave encashed every year while in service | Fully taxable as salary |
The Act says “at the time of his retirement, whether on superannuation or otherwise” — so the exemption is not limited to retirement at 58/60.
The ₹25 lakh is a lifetime limit
- If you get leave encashment from two employers in the same year, the total exemption can’t exceed ₹25 lakh.
- Any exemption you already claimed in earlier years (from an earlier job) reduces the ₹25 lakh available now.
- Example: you claimed ₹6 lakh exemption when you left Job A; at retirement from Job B, at most ₹19 lakh more can be exempt.
New regime or old — and the new section numbers
- The exemption works in both regimes. Section 202 (new regime) blocks many exemptions, but not leave encashment on retirement.
- From Tax Year 2026-27 (income from 1 April 2026), it is section 19, Table Sl. No. 13 (government) and 14 (others) of the Income-tax Act, 2025. For earlier years it was section 10(10AA). See old vs new section numbers.
- The taxable part is added to your salary for that year and taxed at your slab rate. Check the effect with the income tax calculator.
Labour codes: how many days can you encash?
Tax law decides how much is tax-free. How many days you can accumulate and encash comes from your employment terms and, for “workers”, the labour codes — which let workers carry forward up to 30 days a year and encash leave at their credit when they leave. See new labour codes.
Frequently asked questions
Is leave encashment taxable?
Leave encashed while in service is fully taxable. Leave encashment at retirement or when leaving the job is fully exempt for government employees, and exempt up to the lowest of four amounts (max ₹25 lakh) for other employees.
What is the leave encashment exemption limit for private employees?
₹25 lakh, notified with effect from 1 April 2023 (earlier ₹3 lakh). It is a lifetime limit, reduced by any exemption already claimed, and covers all employers together.
How is leave encashment exemption calculated?
The lowest of: earned leave at credit (max 30 days per year of service) × average salary; 10 × average monthly salary; ₹25 lakh; and the actual amount received. Salary means basic + DA (if counted for retirement benefits) averaged over the last 10 months.
Is leave encashment on resignation tax-free?
The exemption applies to leave encashment received at retirement “whether on superannuation or otherwise”, so it is not limited to age-based retirement. The same 4-way formula and ₹25 lakh lifetime limit apply.
Is leave encashment exempt in the new tax regime?
Yes. Section 202 of the Income-tax Act 2025 does not block this exemption, so it is available in both the new and old regimes.
What is the new section for leave encashment under the Income-tax Act 2025?
Section 19, Table Sl. No. 13 (government employees) and Sl. No. 14 (other employees). It was section 10(10AA) under the 1961 Act.
Official links
Use only these government websites. HumainOne is not connected to any of them.
- Income-tax Act, 2025 — Section 19Leave encashment table (Sl. No. 13–14)
- PIB — ₹25 lakh limit notifiedLimit raised from ₹3 lakh
- Income-tax Act, 2025 — Section 202New regime: what is not allowed
- Income Tax helplinee-filing queries
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