Decoding the tax exempt standing of encashed leaves

Leave encashment acquired on retirement is exempt from tax. It is eligible solely whether or not it’s acquired on retirement from employment, and by no means if encashed all through the course of employment. Courts have held that such retirement needn’t basically be on retirement at superannuation, nevertheless would moreover cowl situations of leaving an employment by resigning. For workers of the central or state governments, the entire go away encashment amount acquired is exempt, with out limits or conditions. On the other hand, for all totally different workers, there are quite a few conditions and limits which could be related to have the flexibility to declare exemption.

For non-government workers, one state of affairs is that go away entitlement for computing such exemption cannot exceed 30 days for yearly of service. Besides, such go away encashment cannot exceed 10 months, and the exemption must be computed on the premise of the everyday wage drawn inside the ten months, immediately earlier retirement. Besides, there’s an basic cap on the amount of exemption, which is notified now and again by the federal authorities.

Furthermore, if go away encashment was claimed earlier on retirement from each different employer, solely the stableness of the limit could be eligible on retirement.

Recently, a notification was issued, pursuant to the funds announcement by the finance minister, rising the exemption cap on go away encashment from ₹3 lakh to ₹25 lakh, environment friendly 1 April. At first look, this seems a wonderful revenue given to non-government workers. But, is it really so?

The limit of ₹3 lakh was fixed strategy once more in 2002, with influence from 1998. An important aspect is that the laws provides that the limit must be fixed by the central authorities having regard to the limit related to central authorities workers. The limit of ₹3 lakh was as a result of this truth based totally on the very best month-to-month wage of a central authorities employee of ₹30,000 (drawn by the cabinet secretary) in 1998. Given the month-to-month wage of the cabinet secretary at ₹2,92,500 in 2021, the exemption on the market to authorities workers from that 12 months has been ₹29.25 lakh. Therefore, the limit given to non-government workers stays to be lower than what’s being cherished by authorities workers.

That apart, this limit was not enhanced now and again as authorities salaries elevated, nevertheless solely after a interval of 25 years. Employees who retired all through 1998 and March 2023 would have gotten exemption for a most of ₹3 lakh, versus authorities workers who would have gotten a lots larger exemption.

Besides, this limit was not voluntarily elevated by the federal authorities on account of its magnanimity or out of sympathy for non-government workers. The enhancement was necessitated on account of a writ petition filed by workers of public-sector banks and undertakings in opposition to the federal authorities sooner than the Delhi High Court in 2019, claiming standing of presidency workers, and trying to find parity for go away encashment exemption with authorities workers. While the Delhi High Court rejected the rivalry that public sector monetary establishment workers had been authorities workers, in its interim order of November 2019, the courtroom docket found profit throughout the grievance that the limit had not been elevated since 1998.

The courtroom docket had observed that over the various years, the pay-scales admissible to authorities servants, and even workers of most of the people sector enterprise and nationalised banks, and all others, had been upwardly revised, retaining in view the financial growth throughout the nation, along with on account of rising inflation, and that the ultimate drawn salaries had elevated manifold given that ultimate notification. It had as a result of this truth requested the federal authorities to file a counter-affidavit in that regard. This writ petition stays to be pending sooner than the extreme courtroom docket. The movement of the federal authorities has come three years after the Delhi High Court observations.

It is unfortunate that every tax exemption comes with so many strings attached, that it usually defeats the intention of giving the exemption. Could the notification rising the limit not have been issued every three or 5 years? Could the federal authorities not have been additional magnanimous, offered that it was answerable for not issuing any notification for 25 years? There are so many provisions requiring notification now and again, that one wonders whether or not or not the intention of all that’s each to create additional jobs throughout the authorities to cope with such work, or to quietly reduce the price of the revenue being equipped by not issuing a notification.

Gautam Nayak is affiliate at CNK & Associates LLP.

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Updated: 05 Jun 2023, 11:17 PM IST

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