Tax Exemption for Leave Encashment Raised to ₹25 Lakh: A Boost for Non-Government Employees

Introduction:
In a significant move that brings relief to non-government employees, the Indian government has recently announced a substantial increase in the tax exemption limit for leave encashment. Previously limited to ₹3 lakh, the tax exemption has now been raised to ₹25 lakh as per the press release and Notification No.31/2023 dated 24.05.2023. This revision, in line with the proposal presented in the Budget Speech 2023 by the honorable Finance Minister, marks a significant milestone in recognizing the evolving needs of non-government salaried employees. The increased limit offers enhanced financial security and retirement planning opportunities for individuals, fostering employee satisfaction and boosting their overall financial well-being.

Background:
Under section 10(10AA)(ii) of the Income-tax Act, 1961, non-government salaried employees were previously eligible for tax exemption on leave encashment, limited to ₹3 lakh. This provision covered the period of earned leave at the employee's credit upon retirement, whether due to superannuation or other reasons. However, acknowledging the limitations of the previous limit and in line with the proposed changes in the Budget Speech 2023, the Central Government has now notified the increased limit for tax exemption on leave encashment to ₹25 lakh, effective from 1st April 2023.

Key Highlights of the Increased Exemption Limit:
The revised tax exemption limit on leave encashment brings several important provisions that non-government employees should be aware of:

1. Revised Exemption Limit: The new exemption limit is set at ₹25 lakh. This means that non-government employees can now avail tax exemption on leave encashment up to this amount.
2. Multiple Employers: If an employee receives leave encashment from more than one employer in the same previous year, the aggregate amount exempt from income tax shall not exceed ₹25 lakh. This provision ensures that employees with multiple sources of income can still benefit from the increased exemption limit.
3. Adjustments for Previous Exemptions: The total amount exempt from income tax under section 10(10AA)(ii) shall not exceed ₹25 lakh after considering any tax exemptions already allowed in the employee's total income in any previous year(s). This provision ensures that previous exemptions granted under the same section are duly considered and adjusted to avoid duplication.

Benefits of the Increased Exemption Limit:
The decision to raise the tax exemption limit for leave encashment to ₹25 lakh holds several advantages for non-government employees. Let's delve into some of the key benefits this revision brings:

1. Financial Security: With a higher exemption limit, employees can now enjoy greater financial security during their post-employment phase. The increased amount will help individuals meet their monetary requirements, such as medical expenses, housing, and other essential needs.
2. Enhanced Retirement Planning: The higher limit allows employees to engage in more effective retirement planning. They can now accumulate a substantial amount through leave encashment, empowering them to invest or create a retirement corpus that ensures a comfortable and worry-free retirement.
3. Flexibility in Utilization: The revised limit provides greater flexibility in utilizing the encashed leave amount. Individuals can allocate the funds as per their specific needs, such as settling outstanding loans, funding education for children or grandchildren, or pursuing personal aspirations.
4. Encouragement for Long Service: The previous limit often discouraged employees from utilizing their accumulated leaves fully. With the increased exemption, employees will be motivated to utilize their earned leaves and plan their careers in a way that allows them to take advantage of this benefit in the future.
5. Boost to Employee Morale: This revision positively impacts employee morale and job satisfaction. Non-government employees can now anticipate higher post-retirement benefits, which can enhance their commitment and dedication towards their organization. It also serves as a competitive advantage for employers, attracting and retaining top talent.

Conclusion:
The decision to raise the tax exemption limit for leave encashment to ₹25 lakh for non-government salaried employees is a positive development that addresses the financial needs and retirement planning requirements of the workforce. The increased limit offers individuals greater financial security, flexibility in utilizing their accumulated leave days, and motivation to fully utilize their earned leaves. This move is expected to enhance employee morale, attract and retain talent, and create a more favorable work environment. Non-government employees can now look forward to a more financially stable future, as their accumulated leave days can be effectively utilized to support their retirement goals and aspirations.

For detailed information and the official notification regarding the increased tax exemption limit for leave encashment, readers can refer to Notification No.31/2023 dated 24.05.2023, available at https://egazette.nic.in.