Union Finance Minister Nirmala Sitharaman announced several important measures in her annual Budget speech on 1st February 2023. One of the most significant announcements was the increase in tax exemptions for leave encashment on the retirement of non-government salaried employees. The tax exemption has been hiked from ?3 lakh to ?25 lakh, which is a significant jump and will benefit a large number of employees.
Revenue Secretary Sanjay Malhotra spoke to Times of India and said that the increase in tax exemptions would mean that employees would save almost ?7 lakh. He also added that if the exemptions are spread over 30-35 years, it would work out to more than ?20,000 a year. According to Malhotra, the majority of personal income taxpayers in India are salaried employees and hence this new leave encashment exemption would be a great relief for them, both under the new tax regime or the old. He also mentioned that government employees, including those working for AIIMS, would also benefit from the new exemption.
Leave encashment is a compensation provided by an employer to employees for unutilised paid leaves. As per India’s labour laws, every salaried person is entitled to a minimum number of paid leaves every year, but not all of them are utilised. Unutilised paid leaves are carried forward to the next year, and at the time of retirement or resignation, the employer is required to compensate the employee for the unutilised paid leaves.
The leave encashment is taxable as per the law and forms a part of ‘income from salary’. Employees can claim tax relief under Section 89 of the I-T Act by filling out form 10E. The Centre’s decision to increase the tax exemptions for leave encashment will help employees save a significant amount of capital and provide them with financial security during retirement.
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