Leave Encashment Tax Exemption: Limits and Examples
Leave encashment on resignation or retirement is tax-free up to the least of four limits, including ₹25 lakh. How the limits work, with worked examples, in both regimes.
Updated 27 September 2026 · 3 minute read
Leave encashment is taxable when you receive it while still in a job, and largely tax-free when you receive it on leaving. For private-sector employees the exemption on resignation or retirement is the least of four amounts, one of which is a lifetime cap of ₹25 lakh. Central and state government employees are fully exempt.
The exemption used to be section 10(10AA). Under the Income-tax Act, 2025 it sits in section 19, and it applies in both the new and the old regime.
When it is taxed and when it is not
| When you get the money | Tax treatment |
|---|---|
| Encashing leave while still employed, for example at year end | Fully taxable as salary |
| On resignation, retirement or superannuation, private sector | Exempt up to the least of four limits |
| On retirement, central or state government employee | Fully exempt |
| Paid to your family after death | Not taxable as salary |
The four limits
For a private-sector employee leaving a job, the tax-free part is the least of:
- The cash value of the leave at your credit, where earned leave is counted at no more than 30 days for each completed year of service.
- Ten months' average salary. Salary here means basic plus DA and any commission on turnover, averaged over the ten months before you leave.
- ₹25 lakh, the amount currently notified. It is a lifetime limit: exemptions you took with earlier employers count against it.
- The amount you actually receive.
Anything above the least of these is taxed as salary in the year you receive it.
Worked example: a typical resignation
Priya resigns after 12 years. Her basic plus DA is ₹80,000 a month, and she has 250 days of earned leave at credit, which the company encashes on basic plus DA at ₹80,000 ÷ 30 per day.
| Limit | Amount |
|---|---|
| Cash value of leave: 250 days × ₹2,667 | ₹6,66,667 |
| Ten months' average salary: 10 × ₹80,000 | ₹8,00,000 |
| Notified ceiling | ₹25,00,000 |
| Actually received | ₹6,66,667 |
The least is ₹6,66,667, so her entire encashment is tax-free. That is the usual outcome for most people: the ceiling only starts to matter at high salaries and long tenures.
Worked example: where the ceiling bites
Rahul retires with basic plus DA of ₹3,00,000 a month and 300 days of leave at credit. His encashment is 300 × ₹10,000 = ₹30 lakh.
| Limit | Amount |
|---|---|
| Cash value of leave | ₹30,00,000 |
| Ten months' average salary | ₹30,00,000 |
| Notified ceiling | ₹25,00,000 |
| Actually received | ₹30,00,000 |
The least is ₹25 lakh, so ₹25 lakh is tax-free and ₹5 lakh is taxed as salary. Had he taken a ₹3 lakh exemption at an earlier job, only ₹22 lakh would be available now.
Things that catch people out
- Encashing leave every year is not exempt. If your employer pays out unused leave annually, that money is ordinary salary.
- The labour codes do not treat leave encashment as an allowance, so it does not count towards the 50% wage rule explained in how the labour codes change your salary.
- The exemption works in both regimes. Unlike HRA, it is not one of the reliefs the new regime removes.
- It is paid with your final settlement. See full and final settlement rules for what else comes with it and when.
Frequently asked questions
Is leave encashment taxable on resignation?
Only above the exempt limit. On resignation, a private-sector employee's leave encashment is tax-free up to the least of the cash value of leave at credit, ten months' average salary, ₹25 lakh and the amount received.
What is the leave encashment exemption limit?
₹25 lakh for private-sector employees, as a lifetime limit across all employers. Government employees have no limit; their leave encashment on retirement is fully exempt.
Is leave encashment exempt in the new tax regime?
Yes. The exemption is in section 19 of the Income-tax Act, 2025 and applies in both the new and the old regime.
Is leave encashment during service taxable?
Yes, fully. Only encashment received when you leave the job, by resignation or retirement, gets the exemption.
Which salary is used for the ten months' average?
Basic pay plus dearness allowance, and commission if it is a fixed percentage of turnover, averaged over the ten months immediately before you leave.