Leave Encashment Tax Calculator — Section 10(10AA)

Quick answer

Leave encashment received at retirement or resignation is tax-free under Section 10(10AA) up to the lowest of four amounts: the amount actually received, ₹25 lakh, 10 months' average salary, and the cash value of unused leave calculated at a maximum of 30 days for each completed year of service. Anything above that is taxed as salary. Central and state government employees get full exemption, while leave encashed during service is fully taxable.

What leave encashment is, and why tax depends on timing

Most employers let you carry forward unused earned leave or privilege leave. When you leave the job, retire, or sometimes during service, the employer pays you cash for those unused days. That payment is called leave encashment or leave salary.

For income tax, the key question is when you received it. If you encash leave while you are still working with the employer, the entire amount is added to your salary and taxed at your slab rate. There is no exemption at all.

If you receive it when you retire, whether on superannuation, voluntary retirement or resignation, a part or all of it is exempt under Section 10(10AA). The exempt part depends on your length of service, your average salary, the leave you were entitled to and a lifetime cap of ₹25 lakh.

This leave encashment calculator works out the exempt and taxable parts for you, using the same four limits the law uses. You need a few numbers from your full and final settlement and your salary slips.

How to use this leave encashment calculator

The calculator asks six questions. Fill them in this order:

1. Government employee? Choose Yes only if you were employed by the Central Government or a State Government. If you choose Yes, the calculator shows the whole amount as tax-free and stops there. Employees of public sector banks, PSUs, statutory boards and local bodies should usually choose No.
2. Leave encashment received — the gross leave encashment shown in your full and final settlement, before TDS.
3. Average monthly salary (last 10 months, basic + DA) — add your basic salary (and dearness allowance, if it counts for retirement benefits) for the 10 months immediately before you left, and divide by 10. Do not include HRA, special allowance, bonus or reimbursements.
4. Completed years of service — full years with this employer. A part year is not rounded up.
5. Leave days to your credit at exit — the earned leave balance your employer paid you for. This is usually printed in the settlement letter.
6. Leave days availed during service — the total earned leave you actually took over all your years with this employer. Your HR or payroll team can give you this figure.

The result shows the tax-free amount, the taxable amount, and each of the limits side by side: the amount received, the ₹25 lakh cap, 10 months' average salary and the cash value of eligible leave, with the number of eligible days.

Reading your settlement letter

Full and final settlement letters are not always easy to read. Look for a line called "leave encashment", "EL encashment", "leave salary" or "PL encashment". Next to it you will usually see the number of days paid and the rate per day. If the rate per day is your monthly basic divided by 30 (or by 26, which some companies use), the employer has calculated on basic. If the rate is much higher, it has probably used gross salary. Either way, enter the actual rupee amount received in the calculator. The law, not the company's method, decides how much of it is exempt.

If the letter shows a single combined amount for leave, gratuity and bonus, ask HR for a break-up. Each of these has a different tax rule, and you cannot apply the leave encashment exemption to a combined figure.

The formula: lowest of four amounts

For a non-government employee, the exemption under Section 10(10AA) is the least of:

1. The leave encashment actually received.
2. ₹25,00,000, the limit notified by the government for retirements from 1 April 2023 onward.
3. 10 × average monthly salary.
4. Cash equivalent of the unused leave to your credit, where leave is counted at no more than 30 days for every completed year of service.

How the calculator finds eligible leave days

The fourth limit is the one most people get wrong, so here is exactly how the calculator works it out:

• Maximum leave you could have earned for tax purposes = 30 days × completed years of service.
• Subtract the leave you actually took during service.
• Eligible days = the lower of that figure and the leave actually to your credit.
• Cash equivalent = eligible days × average monthly salary ÷ 30.

So even if your company policy gives you 36 or 45 days of leave a year, for tax only 30 days a year are counted. Leave you have already used is deducted from that entitlement.

What "salary" means here

For this exemption, salary means basic salary, plus dearness allowance if the terms of employment treat it as part of retirement benefits, plus any commission paid as a fixed percentage of turnover. It does not include HRA, conveyance, special allowance, perquisites or bonus. Use the same definition for the average.

The average is taken over the 10 months immediately before the date of retirement or resignation. If you got an increment in that period, the average will be somewhere between your old and new basic.

Which limit usually decides the answer

Each of the four limits stops a different kind of over-claim. The "amount received" limit means you can never claim more than you got. The ₹25 lakh cap stops very large payouts from being fully tax-free. The 10-months limit puts a ceiling linked to your pay. The leave-based limit makes sure only genuine unused leave, at a sensible accrual of 30 days a year, is exempt.

For most private sector employees with moderate salaries, the leave-based limit is the one that applies, because few people leave with more than 300 days of eligible unused leave. For senior employees with long service and high pay, the ₹25 lakh cap often decides it. The 10-months limit applies when someone has a very large leave balance relative to their pay, since 10 months of salary is the value of 300 days of leave.

Limits and rules at a glance

From tax year 2026-27, the Income-tax Act, 2025 renumbers sections such as 10(10AA). This calculator follows the familiar section number and the ₹25 lakh limit shown.

Worked examples

Example 1: Private sector employee retiring after 20 years

Mr. Sharma retires from a private company after 20 completed years. His basic salary averaged ₹80,000 a month over the last 10 months. He had 240 days of earned leave to his credit and had taken 300 days of leave during his service. His employer paid ₹7,50,000 as leave encashment.

• Maximum leave for tax: 30 × 20 = 600 days. Less 300 days taken = 300 days.
• Eligible days = lower of 300 and 240 = 240 days.
• Cash equivalent = 240 × ₹80,000 ÷ 30 = ₹6,40,000.
• 10 months' average salary = ₹8,00,000.
• ₹25 lakh cap.
• Amount received = ₹7,50,000.
• Exempt = lowest of these = ₹6,40,000.
• Taxable = ₹7,50,000 − ₹6,40,000 = ₹1,10,000.

The employer paid more than the tax-exempt value, perhaps because it calculated leave on gross salary rather than basic. Only ₹1.1 lakh is taxable, and it is added to his salary for the year.

Example 2: Senior executive who hits the ₹25 lakh cap

Ms. Iyer retires after 30 years. Her average basic over the last 10 months was ₹3,00,000 a month. She had 300 days to her credit and had taken 500 days over her career. She received ₹30,00,000.

• Maximum leave for tax: 30 × 30 = 900 days. Less 500 taken = 400 days.
• Eligible days = lower of 400 and 300 = 300 days.
• Cash equivalent = 300 × ₹3,00,000 ÷ 30 = ₹30,00,000.
• 10 months' average salary = ₹30,00,000.
• Amount received = ₹30,00,000.
• ₹25 lakh cap = ₹25,00,000.
• Exempt = ₹25,00,000. Taxable = ₹5,00,000.

Here the statutory cap is the limiting factor. Before 1 April 2023 the cap was much lower, so a retirement like this would have meant a far bigger taxable amount.

Example 3: Resignation where leave taken reduces the exemption

Priya resigns after 12 completed years. Her average basic was ₹60,000 a month. Her company let her accumulate 280 days, and she had taken 250 days of leave over 12 years. She received ₹9,00,000.

• Maximum leave for tax: 30 × 12 = 360 days. Less 250 taken = 110 days.
• Eligible days = lower of 110 and 280 = 110 days.
• Cash equivalent = 110 × ₹60,000 ÷ 30 = ₹2,20,000.
• 10 months' average salary = ₹6,00,000.
• Exempt = ₹2,20,000. Taxable = ₹6,80,000.

Priya's company had a generous leave policy, but the tax law counts only 30 days a year and deducts the leave she used. That is why most of her payment is taxable. People are often surprised by this, so it is worth running the numbers before your last working day.

Example 4: State government employee

Mr. Verma retires from a State Government department and receives ₹18 lakh as leave encashment. Since he is a government employee, the entire ₹18 lakh is exempt. The calculator shows "Fully tax-free" as soon as you select Yes for government employee.

The four examples side by side

The pattern is clear. Service length and leave actually used matter more than the leave balance your company shows, and for high earners the statutory cap is what usually decides the taxable amount.

Retirement, resignation, VRS and other exits

Section 10(10AA) talks about leave salary received "on retirement, whether on superannuation or otherwise". In practice, this covers normal retirement at superannuation age, voluntary retirement and resignation. The exemption is therefore usually available when you resign from a private job and move to another employer, not only when you retire for good.

If you change jobs several times, each exit can give rise to an exemption, but the ₹25 lakh cap is for your whole life. Exemptions claimed earlier are reduced from it. Keep a record of the exempt amount shown in each employer's Form 16, so you know how much of the cap is left.

The calculator always uses the full ₹25 lakh cap. If you have claimed leave encashment exemption at an earlier job, reduce the cap yourself. For example, if you claimed ₹4 lakh at a previous employer, your remaining cap is ₹21 lakh. If the calculator shows an exemption above ₹21 lakh, your actual exemption is limited to ₹21 lakh and the rest is taxable.

If you resign and your unused leave is adjusted against your notice period instead of being paid out, there is no leave encashment to tax. The leave simply covers days you would otherwise have worked or paid for.

Leave encashment paid to the legal heirs of an employee who dies in service is generally not taxable in the hands of the heirs. If you are handling such a payment for a family member, keep the employer's letter showing the nature of the payment.

Special cases

PSU, bank and autonomous body employees

Full exemption is only for employees of the Central Government and State Governments. Employees of public sector undertakings, nationalised banks, statutory corporations, universities and local authorities are treated like private sector employees for this purpose. They get exemption up to the four limits, including the ₹25 lakh cap.

Two exits in the same financial year

If you leave one employer and then another in the same year, and both pay leave encashment, the total exemption still cannot cross ₹25 lakh. Each employer may calculate exemption independently in its Form 16, so you have to check the combined figure when you file your return and pay tax on any excess.

Leave encashment taken every year

Some companies allow employees to encash a few days of leave every year. That money is paid during service and is fully taxable in that year, with no exemption. It also reduces the leave balance you carry to the end. How such encashed days should be treated when working out the exemption at exit is not always straightforward, so ask payroll for a clear year-wise leave record and get the working checked if the amount is large.

Retirements before 1 April 2023

The ₹25 lakh cap applies to retirements and resignations on or after 1 April 2023. Before that, the cap for non-government employees was ₹3 lakh for many years. If you are filing an old return, revising a past year or dealing with a notice for an earlier year, use the limit that applied in that year, not the current one. This calculator uses the current ₹25 lakh limit.

Commission employees

If part of your pay is commission at a fixed percentage of the turnover you achieve, that commission is included in salary for calculating the average. Commission that is a fixed amount or discretionary is not included.

When your employer has already worked out the exemption

Your employer usually calculates the exemption, shows it in Form 16 and deducts TDS on the taxable part. You can use this leave encashment calculator to check their figure. If you find a difference, speak to payroll first. If the employer will not correct it, you can claim the correct exemption in your own return, but keep the working and documents ready in case the department asks.

Common mistakes to avoid

• Using gross salary for the average. Only basic, eligible DA and turnover-based commission count. Using CTC or gross pay inflates the exemption.
• Ignoring leave already taken. The 30-days-a-year entitlement is reduced by leave you used. Skipping this step makes the fourth limit look much bigger than it is.
• Counting more than 30 days a year. Your company may give more leave, but tax counts only 30 days for each completed year.
• Rounding up service. Only completed years count. Eleven years and eleven months is eleven years.
• Treating PSU or bank jobs as government. Full exemption is only for Central and State Government employees.
• Forgetting earlier exemptions. The ₹25 lakh cap is lifetime. If you claimed an exemption at an earlier job, reduce the cap by that amount.
• Not reporting the exempt amount. Even the tax-free part should be shown in your return under exempt allowances. It keeps your return consistent with Form 16.

Leave encashment, gratuity and other exit payments

Leave encashment is usually one part of a full and final settlement. Other parts may include gratuity, notice pay, bonus, unpaid salary and, for some employees, commuted pension. Each has its own tax rule, so it helps to separate them line by line.

• Gratuity is exempt up to ₹20 lakh for non-government employees, subject to its own formula. You can work it out with the gratuity calculator.
• Salary for the last month and notice pay are fully taxable as salary.
• Bonus and incentives paid at exit are fully taxable as salary.
• Leave encashment follows Section 10(10AA) as explained above.

Because all the taxable parts are added to your salary for the year, an exit settlement can push you into a higher slab. Run your total salary through the income tax calculator to see the overall tax and to compare the old and new regimes.

Documents you need

Before you use the calculator or file your return, collect these:

• Full and final settlement statement showing leave encashment, gratuity and other payments separately.
• Salary slips for the last 10 months, to work out the average basic and DA.
• Your appointment letter and service certificate, for the date of joining and date of exit.
• Leave record from HR showing leave earned, leave availed and closing balance.
• Form 16 from the employer, showing the exemption claimed under 10(10AA) and TDS deducted.
• Form 16s from earlier employers, if you claimed leave encashment exemption before.
• Form 26AS and AIS from the income tax portal, to check that TDS has been deposited.

How it goes into your income tax return

In your ITR, the gross leave encashment is part of your salary. The exempt amount is then shown separately as an allowance exempt under Section 10(10AA), and only the balance is taxed. In ITR-1 and ITR-2, the salary schedule has a drop-down for exempt allowances where you select this section and enter the amount.

The figures you enter should match Form 16. If you are claiming a different exemption from what the employer allowed, the return will still be processed, but a mismatch with Form 16 or AIS can lead to a proposed adjustment. Keep your working ready so you can respond quickly.

How the taxable part is actually taxed

The taxable part of leave encashment does not have its own rate. It is simply added to your salary income for the year and taxed at your slab rate. Take Mr. Sharma from Example 1, whose taxable leave encashment was ₹1,10,000. If his other salary already puts him in the 30% slab, the extra tax is 30% of ₹1,10,000, which is ₹33,000, plus 4% cess of ₹1,320, a total of ₹34,320. If his income is lower, the rate on that ₹1.1 lakh will be lower too.

The exemption under Section 10(10AA) is available whether you choose the old regime or the new regime. What changes between regimes is only the slab rate applied to the taxable part and the other deductions you can claim. The salary take-home calculator can help you see your regular monthly salary picture, while the settlement is better checked in the full income tax calculator.

If your employer deducted more TDS than needed, for example because they did not allow the exemption, you will get the extra back as a refund after your return is processed. You can file and track this on the official income tax e-filing portal.

Planning before your last working day

A little planning before you resign or retire can help:

• Ask HR for your leave record early, so you can check the figure they will use.
• Understand whether your company calculates leave encashment on basic only or on gross pay. If it pays on gross, part of the payment will be taxable regardless.
• Check whether any part of your settlement is being paid as leave encashment during service, for example in the month before your exit date. Leave encashed during service gets no exemption.
• Ask for the settlement statement in writing before the final payout, so you can run this calculator and raise any error with payroll while you still have access to HR.
• If you are retiring with a large settlement, consider the timing of other income in that year, such as capital gains, to avoid stacking everything into one high-tax year.

Get it checked by an expert

Exit settlements mix several payments, each with its own rule, and employers do not always get the leave encashment exemption right. TaxCaller's expert can check your full and final statement, confirm the exempt amount, reconcile it with Form 16 and AIS, and file your return. The fee is told upfront before any work begins, and the first call is free. Visit our income tax filing service to talk to an expert.