The tax exemption on leave encashment for the private sector has been increased to Rs 25 lakh.

The government has decided to increase the scope of tax exemption on leave encashment for the employees of the private sector.

The Union Budget 2023, presented by Finance Minister Nirmala Sitharaman, included some crucial pointers for the people working in the private sector. One of the statements made by the Minister that caught attention was the scope of exemption of income tax on the money received by salaried employees’ leave encashment. The tax exemption limit for the leave encashment has been raised by more than eight times. After the announcement, the tax exemption has already been approved by the government, and implemented by the Income Tax Department.

While the scope of tax exemption for leave encashment was already big for the government sector, the same will be the case for employees of the private sector now. The tax exemption on leave encashment has been increased to Rs 25 lakh instead of Rs 3 lakh. Tax experts are of the view that this is a positive step given the current inflated economy.

Every company has to pay Earned Leave or Paid Leave to its employees. If an employee has leaves left after they retire or leave the company, they are paid cash in place for pending leaves. For those who do not know, government employees already receive a tax exemption of Rs 25 lakh on leave encashment, however, the exemption was not applicable to the private sector till now. During the budget speech 2023, the Finance Minister announced that now the private sector will also be eligible for the same tax exemption on leave encashment up to 25 lakhs, just like the government employees.

The labour law states that if any employee has paid leaves pending, they are supposed to receive money for it. In the meantime, the pending leaves for every month are carried forward. Later on, the money is finally paid once an employee retires or leaves the company.

On the other hand, it should also be noted here that if an employee takes paid leave money during his tenure in an organisation, then he will not be subjected to any tax exemption. This amount will be tax-free under section 10(10AA) of the Income Tax.



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