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By Nilesh Patil Roll No : 112 MMS Finance 2

Taxation of Leave Salary


Cases Status of Employee Govt / NonGovt Employee Govt Employee Nature of Leave Encashment Leave encashment during Continuity of employment Leave encashment at the time of retirement / leaving job Leave encashment at the time of retirement / leaving job Taxability

Chargeable to tax. However relief possible under section 89 Fully exempt from tax under section 10(10AA)(i) Fully or partially exempt from tax in some cases under section 10(10AA)(ii)

Non-Govt Employee

For Case 3
Exemption is calculated as LEAST of the following:
Period of earned leave (in Months) to the credit of the 1. employee at the time of his retirement/leaving job Avg monthly salary. 2. 10 Avg monthly salary. 3. The amount specified by the Government i.e., Rs. 3 Lacs 4. Leave encashment actually received at the time of retirement.

Calculation Steps
A B C
Find out duration of services in Years (Ignore fraction of year).

Find out rate of earned leave entitlement from service rules Leave credited (in days) for each year of services (max 30 days for every year of actual services rendered for the employer from whose services he has retired).

Find out earned leave actually taken or enchased (in number of days) during the service time

Leave standing to the credit of an employee = [A B] [C 30]

For Average monthly salary Calculation


Salary, for this purpose, means Basic + DA (If any) It also includes commission based upon fixed

percentage of turnover achieved by an employee, (if any). Average Salary for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement.

Insurance Policy Sec 10(10D)


As per Section 10(10D) of the Income Tax Act, 1961, any sum received

under a Life Insurance Policy, including the sum allocated by way of bonus on such policy is exempt from tax.

The Rule does not apply to following amounts: Sum received under Section 80DD(3), or Sum received under a Keyman Insurance Policy, or Sum received other than as death benefit under an insurance policy which has been issued on or after April 1, 2003 and If the premium paid in any of the years during the term of the policy is more than 20% of the Actual Capital Sum Assured. The Finance Bill, 2012 has proposed that the exemption under Sec 10 (10D), on benefits you receive under life insurance policies issued on or after 1st April, 2012, shall be available only if the premium payable in any of the years is not more than 10% of the Sum Insured. However, the death benefit under your plan is always tax-free under sec 10(10D)

Sr No
1. 2. 3. 4. (a) (b)

Nature of the Policy Any sum received u/s 80DD Keyman insurance policy Any other policy (sum received on the death of a person) Any other policy (not being the case when sum received on death) Policy issued before April 1, 2003 Policy issued on or after April 1, 2003 but before April 1, 2012 Policy issued on or after April 1, 2012

Whether exemption is available u/s 10(10D)


Exemption not available Exemption not available Exemption available, nothing is chargeable to tax.

Exemption available, nothing is chargeable Exemption available only when annual premium payable is not more than 20% of sum assured Exemption available only when annual premium payable is not more than 10% of sum assured

(c)