Section 10(10AA) Leave Encashment Rules (2026)
Leave encashment is the payment received by an employee for unavailed accumulated earned leaves at the time of retirement or resignation.
| Category | Timing of Encashment | Tax Exemption Ceiling |
|---|---|---|
| Government Employees | At Retirement / Resignation | 100% Tax-Free (No Limit) |
| Private Sector Employees | At Retirement / Resignation | Min of 4 Factors (Max ₹25 Lakhs) |
| All Employees | During Service / Employment | 100% Taxable (Added to Salary) |
Section 10(10AA) Leave Encashment Exemption Formula
- 4-Factor Exemption Test: Minimum of (1) Actual Encashment Received, (2) ₹25,00,000 Statutory Cap, (3) 10 Months Average Basic+DA Salary, (4) Cash equivalent of unavailed earned leave (max 30 days/yr limit).
- ₹25 Lakh Cap Expansion: Finance Act increased the non-government private employee exemption limit from ₹3 Lakhs to ₹25 Lakhs.
- Government Employees: Central/State Govt employees get 100% tax-free leave encashment at retirement.
Encashment During Service vs At Retirement
- During Employment: Leave encashment received while continuing employment is 100% fully taxable under "Income from Salary".
- At Retirement / Resignation: Exemption benefits under Section 10(10AA) apply only upon retirement, resignation, or superannuation.
Leave Encashment Pro Tip
Avoid encashing leaves during active service. Accumulate leaves up to your company limit and encash them at resignation to claim the ₹25 Lakh tax-free exemption!