Last Updated: June 2026 · 10 min read · By ResumeVera Team
Key facts covered:
- Is leave encashment on resignation taxable? (Yes — but with exemptions)
- Section 10(10AA) exemption: ₹25L limit from CBDT Notification 31/2023
- How the 10-month salary cap and ₹25L lifetime limit interact
- Formula to calculate gross payout and tax-free amount
- Government vs private employee: different rules
- How to report leave encashment in your ITR
Leave Encashment on Resignation in India 2026: Tax Rules, ₹25L Exemption & Calculation
When you resign from a job, your employer pays out your accumulated earned leave as part of the Full & Final settlement. This payment — called leave encashment or earned leave encashment — is taxable for private employees, but a significant exemption under Section 10(10AA) of the Income Tax Act often makes it fully or partially tax-free.
The rules changed substantially in May 2023 when the CBDT raised the exemption limit from ₹3 lakhs to ₹25 lakhs. This guide explains the updated rules, the exact calculation, and how to ensure you claim the full exemption you are entitled to.
Calculate your leave encashment payout
Use our Leave Encashment Calculator to see gross payout, Section 10(10AA) exemption, and net amount — for both private and government employees.
What Is Leave Encashment?
Leave encashment is the monetary payment for unused earned (privilege) leave that an employee has accumulated but not taken. Indian labor law and most employment contracts allow employees to carry forward a certain number of earned leave days each year. On resignation, retirement, or termination, the employer pays out the remaining balance at the employee's current salary rate.
Leave encashment is different from leave adjustment — adjusting earned leave against your notice period reduces the effective notice you serve, but those leaves are not encashed; they are applied against the notice obligation.
The Calculation Formula
Gross Encashment = (Basic Salary + DA) ÷ 30 × Leave Days
Important: only Basic Salary + Dearness Allowance (DA) are used in the calculation. HRA, conveyance, special allowances, variable pay, and other components are excluded. For private IT employees who typically have no separate DA component, use only the basic salary.
Example: Private Employee
- Basic Salary: ₹60,000/month
- DA: ₹0 (no DA component — typical for private IT)
- Monthly salary for calculation: ₹60,000
- Daily salary: ₹60,000 ÷ 30 = ₹2,000
- Earned leave balance: 45 days
- Gross encashment: ₹2,000 × 45 = ₹90,000
Use the Leave Encashment Calculator to compute your payout with the exact exemption applied.
Is Leave Encashment on Resignation Taxable?
The answer depends on whether you are a government or private employee:
| Employee Type | Tax Treatment |
|---|---|
| Central Government Employee | Fully exempt — no upper limit |
| State Government Employee | Fully exempt — no upper limit |
| Private Employee (resignation) | Partially exempt under Section 10(10AA) — up to ₹25L lifetime |
| Private Employee (retirement or death) | Fully exempt — no upper limit |
| Any Employee (during service, not on exit) | Fully taxable — no exemption applies |
Section 10(10AA): The ₹25 Lakh Exemption
The CBDT Notification That Changed Everything
Before May 2023, the maximum tax exemption on leave encashment for private employees on resignation was just ₹3 lakhs — a limit that had not been revised since 2002. The Finance Act 2023 (Budget 2023) amended Section 10(10AA)(ii) and empowered CBDT to notify a higher limit.
CBDT Notification No. 31/2023 (F.No. 200/3/2023-ITA-I, dated 24 May 2023) notified ₹25,00,000 (₹25 lakhs) as the new exemption limit, effective from April 1, 2023. The notification was made retrospective to April 1, 2023, meaning employees who received leave encashment in FY 2023-24 could claim the higher exemption and file revised ITRs to claim refunds of excess TDS deducted.
References:
- CBDT Notifies ₹25L Exemption for Leave Encashment u/s 10(10AA) — Taxmann
- Leave Encashment Tax Rules — ClearTax
- Leave Encashment Exemption under Section 10(10AA) — Darwinbox
Exemption Calculation: The Three-Way Minimum
For private employees on resignation, the tax-exempt amount is the least of the following three figures:
- Actual encashment received
- 10 months' average salary (average of last 10 months' Basic + DA)
- ₹25,00,000 (lifetime aggregate limit)
The amount above the exemption limit is added to your income and taxed at your slab rate.
Worked Examples
Case A — Fully tax-free (most private IT employees):
- Basic: ₹60,000/month, 45 days leave
- Gross encashment: ₹90,000
- 10-month salary cap: ₹6,00,000
- ₹25L limit: ₹25,00,000
- Least of the three: ₹90,000 (actual encashment)
- Exempt amount: ₹90,000 → fully tax-free
Case B — Partially taxable (high basic, large leave balance):
- Basic: ₹3,00,000/month, 90 days leave
- Gross encashment: ₹9,00,000
- 10-month salary cap: ₹30,00,000
- ₹25L limit: ₹25,00,000
- Least of the three: ₹9,00,000 (actual encashment) — within all limits
- Exempt amount: ₹9,00,000 → fully tax-free (below ₹25L lifetime limit)
Case C — Exceeds ₹25L lifetime limit:
- Previously claimed ₹15,00,000 exemption at previous employer
- Current employer: gross encashment ₹18,00,000
- Remaining lifetime limit: ₹25,00,000 − ₹15,00,000 = ₹10,00,000
- Exempt amount: ₹10,00,000 (limited to remaining lifetime limit)
- Taxable amount: ₹8,00,000 — taxed at marginal slab rate
The ₹25L Limit Is a Lifetime Aggregate — Not Per Employer
This is the most important and most misunderstood aspect of Section 10(10AA). The ₹25 lakh limit is a cumulative lifetime ceiling across all employers — not a fresh ₹25L per job change.
According to the CBDT clarification (Press Release dated 25 May 2023): "The aggregate amount exempt from income-tax u/s 10(10AA)(ii) shall not exceed the limit of Rs. 25 Lakhs where such payments are received by a non-government employee from more than one employer in the same previous year."
What this means in practice:
- If you have claimed ₹8,00,000 exemption at a previous company, your remaining lifetime exemption is ₹17,00,000
- If you have never claimed the exemption before, you have the full ₹25,00,000 available
- Keep records of exemptions claimed across all employers — disclose prior exemptions to your current employer for correct TDS computation
Both New and Old Regime: Exemption Available Under Both
A common misconception: you do not need to choose the old tax regime to claim the Section 10(10AA) exemption. The leave encashment exemption is available to employees regardless of which tax regime they have opted for — new or old. Reference: Section 10(10AA) Leave Encashment Tax — Tax2Win
TDS on Leave Encashment: Employer's Obligations
Your employer must apply TDS on the taxable portion of leave encashment at the time of F&F settlement:
- Employer must obtain a declaration from you of any prior exemptions claimed (Form 16 from previous employers)
- TDS is deducted only on the amount exceeding the applicable exemption
- For government employees: no TDS deducted (fully exempt)
- The exemption amount must be reported in Form 16, Part B, and the taxable amount in Part A
If your employer over-deducts TDS (for example, by not accounting for the revised ₹25L limit from April 2023), you can claim a refund by filing your ITR. ITAT Jaipur (2024) granted the benefit of the ₹25L exemption retrospectively in a case where the employer had deducted TDS at the old ₹3L limit. Reference: ITAT Jaipur Restores Leave Encashment Tax Benefit — CA Alley
Leave Encashment in Your ITR
When filing your Income Tax Return:
- The gross encashment is part of your salary income
- The exempt portion is claimed under Schedule EI (Exempted Income) — Section 10(10AA)
- The taxable portion flows into Schedule S (Salary) and is taxed at your slab rate
- If your Form 16 shows incorrect TDS (over-deducted), file ITR to claim the refund
Leave Encashment vs Leave Adjustment vs Leave Lapsing
| Scenario | Tax Treatment | What Happens to Leave Days |
|---|---|---|
| Encashment on resignation | Partially exempt (Section 10(10AA)) | Paid out in F&F settlement |
| Encashment on retirement | Fully exempt (no limit for private) | Paid out — no tax |
| Adjustment against notice period | No tax event | Applied to reduce notice obligation |
| Encashment during service | Fully taxable — no exemption | Paid out, added to salary income |
| Leave lapses (unused, policy cap) | No tax event — no payment made | Lost per company policy |
Quick Reference: Tax-Free Payout at Different Basic Salaries
Assuming 45 earned leave days, 0% DA, private employee, first time claiming exemption (full ₹25L limit available):
| Basic Salary (Monthly) | Gross Encashment (45 days) | 10-Month Cap | Exempt Amount | Tax Due |
|---|---|---|---|---|
| ₹30,000 | ₹45,000 | ₹3,00,000 | ₹45,000 | ₹0 (fully exempt) |
| ₹60,000 | ₹90,000 | ₹6,00,000 | ₹90,000 | ₹0 (fully exempt) |
| ₹1,50,000 | ₹2,25,000 | ₹15,00,000 | ₹2,25,000 | ₹0 (fully exempt) |
| ₹3,00,000 | ₹4,50,000 | ₹30,00,000 | ₹4,50,000 | ₹0 (within ₹25L) |
| ₹8,00,000 | ₹12,00,000 | ₹80,00,000 | ₹12,00,000 | ₹0 (within ₹25L) |
At realistic Indian salary levels and 45 days of leave, most employees are fully covered by the ₹25L exemption. Tax arises primarily for employees who have previously claimed part of the limit, or who have accumulated very large leave balances at high salaries.
After Leave Encashment: What Else Is in Your F&F?
Leave encashment is settled as part of your Full & Final settlement, alongside:
- Unpaid salary for days worked in the final month
- Gratuity (if 5+ years of service) — use our Gratuity Calculator
- Notice period buyout deduction (if applicable) — use our Notice Period Buyout Calculator
- Reimbursement of pending expense claims
F&F is typically processed within 30–45 days of your last working day and credited to your registered bank account.
Frequently Asked Questions
Is leave encashment taxable on resignation in India?
For private employees: yes, leave encashment on resignation is taxable, but you get an exemption under Section 10(10AA) on the least of (a) actual encashment, (b) 10 months' Basic+DA, or (c) ₹25 lakhs lifetime limit (per CBDT Notification 31/2023). Government employees are fully exempt with no upper limit.
What is the ₹25 lakh leave encashment exemption?
CBDT Notification No. 31/2023 (dated 24 May 2023) raised the Section 10(10AA) exemption for non-government employees from ₹3 lakhs to ₹25 lakhs, effective April 1, 2023. This is a lifetime cumulative limit across all employers — not a fresh limit per job change.
How is leave encashment calculated on resignation?
Gross Encashment = (Basic Salary + DA) ÷ 30 × Earned Leave Days. Only Basic + DA are used — HRA, allowances, and variable pay are excluded. The tax-free amount is the least of: actual encashment, 10 months' salary, and ₹25L lifetime limit.
Can I claim leave encashment exemption under the new tax regime?
Yes. Section 10(10AA) exemption is available under both the new and old tax regimes. You do not need to switch regimes to claim leave encashment tax exemption.
What if my employer deducted TDS at the old ₹3 lakh limit?
If your employer deducted TDS based on the pre-2023 limit of ₹3 lakhs instead of the revised ₹25 lakhs, you can claim a refund by filing your ITR and declaring the exempt amount correctly under Schedule EI. ITAT Jaipur (2024) upheld this right to retrospective exemption.
How many leaves can I encash on resignation in India?
There is no statutory cap on the number of earned leaves you can encash on resignation — it depends entirely on your employer's leave accumulation policy. Most private companies cap accumulation at 30–90 days of earned leave. Your appointment letter or HR leave policy document specifies the carry-forward and encashment rules.
