Leave Encashment Tax Rules in India (FY 2026-27)
Leave encashment is the amount paid by the employer when an employee either retires, resigns, or encashes unused earned leave (EL) during service. The tax treatment depends on whether the employee is a government or private sector employee.
Section 10(10AA) – Tax Exemption Limits
| Employee Type | Event | Tax Exemption |
|---|
| Government Employee | Retirement / Superannuation | Fully Exempt (no limit) |
| Private Sector – Retirement | Retirement / Resignation | Least of: (a) Actual amount received, (b) ₹25 Lakhs, (c) 10 months' average salary, (d) Earned leave × Average salary ÷ 30 |
| Private Sector – During Service | Leave encashment during employment | Fully Taxable (no exemption) |
Note: The ₹25 Lakhs limit for private sector employees applies to the total exemption across all employers in your entire career.
Leave Encashment Formula
Leave Encashment Amount = (Monthly Basic Salary ÷ 30) × Number of Leave Days
The exemption amount (for private sector at retirement) is the least of:
- Actual leave encashment amount received
- ₹25,00,000 (current limit as per Finance Act)
- 10 months' average salary (basic + DA)
- (Leave credit ÷ 30) × 10 months' average salary
Frequently Asked Questions
Is leave encashment taxable in India?▼
Leave encashment during service (while working) is fully taxable. Leave encashment at retirement is fully exempt for government employees. For private sector employees at retirement, it is exempt up to ₹25 Lakhs or 10 months' salary, whichever is less, under Section 10(10AA).
What is the maximum leave encashment exemption limit?▼
The maximum leave encashment exemption for private sector employees is ₹25 Lakhs (revised from ₹3 Lakhs by the government). This is a lifetime limit across all employers. Government employees enjoy full exemption with no upper limit.
How many days of leave can be encashed?▼
For the purpose of tax exemption calculation under Section 10(10AA), the maximum number of earned leave days considered is 300 days (30 days × 10 years of service with 30 days leave per year). There is no legal bar on actually encashing more days, but the excess is taxable.