How will I be taxed for depart encashment?

Is depart encashment exempted below Sec 10 (10AA) of the Income Tax Act on retirement? Is the cash acquired from an employer in the direction of encashment of pending leaves be thought of for exemption regardless of the variety of occasions I change jobs?

Till March, the encashment restrict for an worker was ₹3 lakh. My present employer has paid me ₹1.5 lakh in the direction of depart encashment and this isn’t taxable. Now that the federal government has elevated this restrict to ₹25 lakh, will the exemption restrict at my future job with a potential employer be ₹23.5 lakh?

—Name withheld on request

As per the tax legal guidelines, any cost acquired by workers from their employer in the direction of encashment of earned leaves at their credit score, on the time of retirement, whether or not on superannuation or in any other case, shall be exempt from tax, topic to the required limits.

It is vital to notice that the worth of exemption is required to be calculated to as per the tactic prescribed on this regard below the Act, with a most cap of the required restrict.

From the language of the provisions and primarily based on judicial precedents, there’s a view prevailing that the time period ‘retirement (whether on superannuation or otherwise)’ is broad sufficient to incorporate resignation. Thus, depart encashment acquired from employer upon resignation from employment shall be exempt from tax, topic to the required technique of calculation and limits. It might, nonetheless, be famous that any depart encashment acquired whereas persevering with to be in employment with the employer is taxable in arms of worker.

Also, the place any exemption for depart encashment has been thought of in a number of earlier years, such exemption quantity thought of beforehand, shall be decreased from the whole eligible restrict of exemption to be thought of sooner or later. As per the present regulation, the general depart encashment exemption claimed by an worker throughout his lifetime, from a number of employer, can’t exceed the whole restrict specified within the stated provisions (which is at present ₹25 lakh).

It is assumed that that you’ve resigned out of your present employment and acquired ₹1.5 lakh as depart encashment in March this 12 months which was absolutely eligible for exemption as per the required technique of calculation. In such case, if in case you have not availed of this exemption in every other prior years, you may be eligible to avail most exemption of ₹23.5 lakh (as per the present limits) on the time of resignation out of your subsequent employment(s), topic to satisfaction of different circumstances.

Parizad Sirwalla is accomplice and head, world mobility companies, tax, KPMG in India.

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Updated: 03 Sep 2023, 11:00 PM IST