Section 10(10AA) Leave Encashment Rules (2026)
Leave encashment is the monetary compensation paid by an employer to an employee for accumulated, unused earned or privilege leaves. When received upon retirement or resignation, leave encashment qualifies for significant statutory tax exemption under Section 10(10AA) of the Income Tax Act.
For non-government salaried employees, the statutory lifetime tax exemption limit stands at ₹25 Lakhs. Calculate your exact tax-exempt and taxable leave encashment components on our leave encashment taxability calculator and see how it impacts your final settlement on our salary breakup calculator. You can calculate long-term retirement gratuity entitlement on our gratuity calculator, check net monthly take-home salary on our CTC to in-hand calculator, compute overall slab tax on our income tax calculator, and evaluate your complete retirement corpus with our retirement calculator.
| 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!