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Is leave encashment taxable on resignation? Experts explain tax rules
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Moneycontrol•12-10-2026, 17:21
Is leave encashment taxable on resignation? Experts explain tax rules
- •A salaried employee who resigned received Rs 10 lakh in leave encashment, but the employer deducted tax assuming exemption only applies to superannuation retirement.
- •Legal precedents from the Madras and Bombay High Courts confirm that leave encashment tax exemption applies to voluntary resignations as well.
- •The term retirement includes all cases of leaving employment, and the overall tax exemption limit for leave encashment is Rs 25 lakh during a lifetime.
- •The employee can claim the exemption while filing their Income Tax Return and seek a refund for any excess TDS deducted by the employer.
Key Questions Answered
Leave encashment is exempt up to an overall limit of Rs 25 lakh during one's lifetime, regardless of whether an employee resigns or retires upon reaching superannuation, as the term retirement includes resignation under relevant income tax laws and court rulings.
Yes, if the employer has deducted tax assuming resignation does not qualify for exemption, the employee can claim the exemption while filing their Income Tax Return (ITR) to receive a refund for the excess tax deducted.
The Madras High Court in CIT vs R.J. Shahney (1986) and the Bombay High Court in CIT v. D.P. Malhotra (1998) held that the benefit of leave encashment exemption applies to voluntary resignation since acceptance of resignation constitutes retirement from service.
