Leave Encashment Exemption
Updated November 2026 · Free · No sign-up
Calculate leave encashment exemption — at retirement/resignation: government employees fully exempt; private employees exempt up to the least of ₹25 lakh, actual received, 10 × average monthly salary, or cash equivalent of unutilized leave (capped 30 days/year).
Quick answer: Private-sector exemption = least of: (a) ₹25,00,000 (the 2023-raised cap), (b) amount received, (c) 10 × average monthly salary (last 10 months’ basic+DA), (d) unutilized leave (max 30 days per year of service) × average daily salary. Encashment WHILE employed: fully taxable (89 relief aside).
The Least-of-Four (Section 10(10AA))
| Limb | Computation |
|---|---|
| (a) Statutory cap | ₹25,00,000 (raised from ₹3L in 2023 — lifetime aggregate) |
| (b) Actual | Amount received |
| (c) 10-month salary | 10 × average of last 10 months’ basic+DA (+commission % where applicable) |
| (d) Entitlement-capped leave | Unutilized leave, counting max 30 days EARNED per year of service, × average daily salary (monthly ÷ 30) |
Limb (d) is the trap: companies granting 40+ leave days/year still count only 30/year in the exemption math — long-servers with big banks hit (d) or (c) before the ₹25L cap.
Worked Example
₹85,000 average, 18 years, 420 unused days, ₹9,00,000 received: (c) = 8,50,000; (d) = min(420, 18×30=540) = 420 days × 2,833 = ₹11,90,000 → least of (25L, 9L, 8.5L, 11.9L) = ₹8,50,000 exempt; ₹50,000 taxable.
The Status Rules
Government (central/state) employees at retirement: fully exempt. Encashment DURING service (any employer): fully taxable as salary — only exit-time encashment gets 10(10AA). Death: heirs receive it tax-free. The exemption survives the new regime.
Notes
The ₹25L cap aggregates across employers/retirements; leave encashed on switching jobs consumes headroom. Employers split Form 16 accordingly and withhold on the excess — audit limb (d)’s 30-day cap in their working, the most common over-taxing error. The entitlement math itself: leave encashment calculator.
Frequently Asked Questions
How much leave encashment is tax-free?
At exit, the least of: ₹25 lakh, the amount received, 10 months’ average salary, or the value of unutilized leave counted at max 30 days per service year — government retirees are fully exempt.
Is encashment during employment taxable?
Yes, fully — as salary in that year; only termination/retirement encashment gets the Section 10(10AA) exemption.
What is the 30-day cap?
Limb (d) counts leave EARNED at a maximum of 30 days per year of service — generous company policies don’t expand the exemption math.
Is the ₹25 lakh cap per job?
No — lifetime aggregate across all employers; previously exempted amounts consume it.
Does the new regime keep this exemption?
Yes — 10(10AA) applies in both regimes; it’s an exemption, not a deduction.
✓ Formula verified • Last updated: November 3, 2026