Amounts gained in exchange for time off that an employee did not use are referred to as “leave encashment.” An employee has the option to cash in accrued leave during their retirement. It is completed either as part of maintaining service or after quitting a job. Every organization has a different leave encashment policy. Some employers cover the cost of unused absences during the next academic year. Some employers let employees roll over unused vacation days from one year to the next. Additionally, the employer provides for unused leaves at the time of departure. The amount allowed for leave encashment and the ITR Online Apply process depends on the kind of employment.
What is Leave Encashment?
Every salaried person, as per labour law, is entitled to a minimum number of paid leave every year. However, it is not necessary that an individual employee utilises all the leave he is entitled to in a year. In fact, most employers allow the employees an option of carrying forward such unutilised paid leaves.
This would invariably leave the employee with an accumulated unutilised leave balance at the time of retirement or resignation from the company, as the case may be. This compels the employer to compensate the unutilised paid leave of the employees. This concept is better known as leave encashment.
The guidelines and the leave encashment policy vary from one firm to the next. Typically, some employers compensate for the time off taken, while others make adjustments the following year. However, the Factories Act, of 1948 mandates that unclaimed leaves and bonuses be paid by the 7th or 10th of the month following resignation.
What are the types of leaves?
The different types of leaves are mentioned in the leave policy of a company. The leave policies differ from company to company. Here are the types of leaves generally available for employees:
- Casual leave: Casual leaves are available for 7 to 10 days. Employees may avail of these leaves for personal reasons. Encashment of this leave varies from one company to another.
- Earned leave or privilege: An employee can avail of earned leaves with prior notice to the authority. These leaves become eligible for encashment after a specific period. This policy varies from one organisation to another.
- Medical leaves: If employees cannot perform their duties towards the organisation due to health conditions, they must inform the employer of the leaves. The maximum limit of the number of medical leaves available differs from one firm to another.
- Holiday leaves: Holiday leaves are granted by employees, and no salary is deducted for these leaves. The maximum number of holiday leaves differs from one company to another.
- Maternity leaves: Maternity leaves are only available for female employees and can range from 12 to 26 weeks during pregnancy. An employee can ask for an extension, but no payment shall be made for that period. However, these leaves are not available for encashment.
- Sabbaticals: Employees can take leaves for upskilling and expand their knowledge. They can enrol for a course, and for that period of time, the employer will reimburse those leaves.
The notion of Leave Encashment
According to labor laws, every salaried individual is entitled to a minimum amount of paid leave each year. An employee does not always have to use up all of his or her annual leave entitlements. In reality, the majority of firms provide their staff the choice to roll over any unused paid time off.
As a result, the individual would certainly have an unutilized leave balance when they retired or quit their job, as the case may be. This forces the business to reimburse the employees for any paid time off that goes unused. This idea is sometimes referred to as leave encashment.
Requisites of Leave Encashment
- According to employment legislation, every salaried person is entitled to a minimum amount of paid leave each year.
- A worker does not have to use all of the paid time off that is available to him in a given year.
- Most employers provide their staff the choice to roll over any unused paid time off.
- This would often result in the employee having an overall balance of unused leave at the time of departure or retirement from the firm, as applicable.
- Additionally, this mandates the employer to pay back the employees’ unused paid time off.
Benefits of Leave Encashment
- If money is collected for leave encashment while the employee is still working, it must be paid.
- If you leave a job owing to termination or resignation, the money collected based on leave encashment is receivable to you, regardless of whether you work in the public or private sector.
- According to income tax regulations, the value or sum received for leave encashment is treated as payroll income and is taxed equally at the specific tax slab rate that applies to the employee.
- The sum taken toward leave encashment at the time of retirement for government (state and central) representatives is exempt from tax.
- Consider the scenario where you receive Rs. 5 lacks as leave encashment after retirement. Your basic pay (basic + DA + commission) in the 10 months just before retirement was Rs 40,000 per month or a total of Rs 4 lakh. The best exemption you may get in this case is Rs 3 lakh (sanctioned limit). As a result, your income will be estimated and taxed at Rs 2 lakh (Rs 5 lakh – Rs 3 lakh).
- It is not necessary to pay for the return of leave encashment to a late employee’s legitimate heirs.
- Let’s say an employee has redeemed leave in one or more years and has taken advantage of any relevant exceptions. The amount of release requested in this case will be deducted from the 3 lakh rupee limit.
- Employees may be excluded from paying back the money they have accrued for cashing in their leave even if they resign or retire. The director of tax and administration indicated that the sum would be deducted from the amount of the exception that would be granted.
How is Leave Encashment taxed?
In the course of their employment, both private and public sector employees are entitled to a variety of leave options, including sick leave, casual leave, earned leave, and privileged leave. Some of these leaves can be carried over to the following year, but not all of them. If they did not use their leaves, employees may also opt to cash them out.
However, the company decides how many leaves are taken and cashed in, whereas the amount earned and whether the leave is cashed in during employment or at retirement are determined by the tax associations. Again, the taxes depend on whether a person works for the government or a non-governmental organization.
- Leave encashment while working: If an employee elects to cash in their vacation time while still working, the whole amount is due under the heading “Income from Salary.” However, an exemption is offered on a specific amount when registering for returns.
- Leave encashment during the retirement period: The staff is permitted to accept Section 10 exclusions throughout the retirement term (10AA). However, the amount of the exemption is different for government and non-government workers. At the time of retirement, leave encashment is tax-free for government employees, while it is only partially exempt for non-government employees.
- Acquired exact leave encashment
- The last 10 months average monthly salary
- The maximum sum permitted by the government is Rs. 3,000,000.
- For every year of service completed, the cash equivalent of made leaves (up to the maximum of 30 days) is given.
The remaining amount generated would be subject to income tax at the applicable rates. The information on the taxes of leave encashment is provided below.
- Salary paid as a defined percentage of the yearly turnover is recognized for taxation. This comprises base salary, dearness allowance, and labor.
- The pay received in the final 10 months before to retirement is subject to the standard salary of 10 months.
- The maximum of Rs. 3,00,000 will be reduced by the number of exemptions asked earlier if the worker has previously cashed leaves and received an exemption for it.
- The tax that would apply in the event of an employee’s resignation would be comparable to that for retirement.
- The leave encashment would be supported by the worker or employee’s lawful heir or candidate in the event of death. As a consequence, both government and non-government personnel would no longer be subject to taxes.
FAQs
Are leave encashment and leave salary the same?
Leave Salary is a part of leave encashment that is accumulated over time and encashed later.
Is there a change in the leave encashment limit in 2023?
Yes, one of the exemption criteria limits has been increased from Rs 3 lakh to Rs 25 lakh for non-government employees.
Is leave encashment taxable?
Yes, leave encashment is taxable. But the taxation conditions differ between sectors and employers.
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