Increased Tax Exemption on Leave Encashment Benefits Non-Government Employees at Retirement

The Indian government has recently taken a significant step to ease the financial burden on non-government salaried employees during retirement by raising the tax exemption limit on leave encashment.

Leave encashment refers to the conversion of accumulated leave into cash at the time of retirement or resignation.

Previously set at Rs 3 lakh, this limit has now been increased to Rs 25 lakh, a substantial boost that is expected to benefit a wide range of employees, from those in the private and public sectors to entities such as AIIMS.

The revised tax structure, which came into effect on April 1, 2023, is projected to benefit approximately 50 percent of personal income taxpayers who fall under the category of salaried workers.

The decision to raise the tax exemption limit on leave encashment is a significant development that aims to provide relief to non-government employees in their post-retirement financial planning.

Finance Minister Nirmala Sitharaman highlighted the need for this change during her Budget 2023-24 speech, pointing out that the previous limit of Rs 3 lakh had been set in 2002, when the highest basic pay in the government was Rs 30,000 per month.

Considering the substantial increase in government salaries since then, she proposed a revision of the limit to Rs 25 lakh, providing a more realistic and reasonable threshold.

The Central Board of Direct Taxes (CBDT) released a statement clarifying the new tax regulations. According to the CBDT, the amount exempt from income tax under section 10(10AA)(ii) of the Income-tax Act should not exceed Rs 25 lakh if a non-government employee receives such payments from multiple employers within the same previous year.

Tax Exemption | Leave Encashment Benefits Non-Government | private | Employees |
Encashment Benefits Non-Government Employees |

This provision ensures that individuals who receive leave encashment benefits from different sources are also eligible for the increased tax exemption limit.

Leave encashment is considered as ‘Income from Salary’ and is generally taxable. However, Section 10(10AA)(ii) of the Income-tax Act allows salaried employees to claim exemptions on such payments.

Previously, individuals were entitled to an exemption up to a certain threshold, with the maximum limit set at Rs 3 lakh. With the recent amendment, this ceiling has been significantly raised to Rs 25 lakh.

This means that employees can now enjoy tax benefits on leave encashment up to the revised limit, resulting in potential savings of up to Rs 7 lakh in taxes, as stated by Revenue Secretary Sanjay Malhotra.

The increase in the tax exemption limit on leave encashment is expected to positively impact a wide range of employees across various sectors. Private sector workers, public sector employees, and even organizations such as AIIMS, among others, will benefit from this progressive change.

As retirement approaches, employees can now leverage their accumulated leave and receive a larger sum without being burdened by excessive taxes. This revision aligns the tax regulations with the current economic landscape, recognizing the growth in salaries and the evolving needs of retiring individuals.

To conclude, The Indian government’s decision to raise the tax exemption limit on leave encashment from Rs 3 lakh to Rs 25 lakh marks a significant milestone in supporting non-government salaried employees during retirement.

The revised tax structure, effective from April 1, 2023, is expected to benefit a considerable number of salaried workers, providing them with a more substantial financial cushion.

By acknowledging the increased basic pay in the government sector and the changing economic landscape, the government has demonstrated its commitment to addressing the evolving needs of employees. This amendment will not only alleviate the financial burden on retirees but also foster a more equitable and sustainable system for post-employment benefits.

Overall, the increase in the tax exemption limit on leave encashment is a positive step towards ensuring the well-being and financial security of non-government employees at the time of retirement.

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