During service
Taxable
as salary, with TDS
On resignation
Exempt
up to four limits
Lifetime cap
₹25 lakh
across all employers
Both regimes
Yes
new and old
Tax year 2026-27 under the Income-tax Act, 2025, which keeps the former section 10(10AA) rules. Checked in September 2026.
See the tax on the taxable part
Add any taxable encashment to your annual salary to see the slab it falls into.
How the leave encashment exemption is calculated
If you are a private-sector employee leaving a job, the tax-free amount is the least of these four figures:
| Limit | How to work it out |
|---|---|
| 1. Amount actually received | The encashment on your full and final settlement |
| 2. Ten months' average salary | Average monthly salary × 10 |
| 3. Cash value of unused leave | Unused leave days, capped at 30 for each completed year of service, × average salary per day |
| 4. Lifetime limit | ₹25 lakh, less any leave encashment exemption claimed from earlier jobs |
Average salary is the key input. It is basic pay, plus dearness allowance only if your terms count it for retirement benefits, plus commission fixed as a percentage of turnover, averaged over the 10 months before you leave. HRA, special allowance, bonuses and variable pay don't count. In a typical Bengaluru or Hyderabad tech CTC, basic is often 40% to 50% of fixed pay, so the exemption is built on well under half your monthly salary.
The ₹25 lakh limit was raised from ₹3 lakh from 1 April 2023 (PIB).
Worked example: resigning with 90 days of unused leave
An engineer with 6 completed years, a basic salary of ₹1,00,000 a month for the last 10 months, and 90 days of earned leave to encash. The two columns differ only in what salary the employer pays the encashment on.
| Step | Paid on basic salary | Paid on gross salary (₹2,00,000) |
|---|---|---|
| 1. Amount received | ₹3,00,000 | ₹6,00,000 |
| 2. Ten months' average salary | ₹10,00,000 | ₹10,00,000 |
| 3. Cash value of 90 days on basic | ₹3,00,000 | ₹3,00,000 |
| 4. Lifetime limit | ₹25,00,000 | ₹25,00,000 |
| Exempt (the least) | ₹3,00,000 | ₹3,00,000 |
| Taxable as salary | Nil | ₹3,00,000 |
When encashment is paid on basic, it is usually fully exempt. When your employer pays it on gross salary, which is more generous to you in cash, everything above the basic-salary value is taxed at your slab rate. That can be up to 30% plus 4% cess under either regime. You still come out ahead; it just isn't all tax-free.
Encash now or on exit?
| Option | Tax | When it makes sense |
|---|---|---|
| Encash leave during the year (where your policy allows) | Fully taxable, TDS at your slab rate | You need the cash now, or your policy lapses leave beyond a limit |
| Carry leave forward and encash on exit | Exempt up to the four limits | You expect to change jobs or retire, and your policy lets leave build up |
| Take the leave | No tax event | Usually the best value: paid at full salary, not just basic |
Your company's leave policy decides how many days you can carry forward and encash. The tax rules only decide how much of the payout is tax-free.
Before you sign your full and final settlement
- Ask HR for the leave balance and the salary the encashment is calculated on.
- Check that your employer has applied the exemption before deducting TDS, and that it appears in Form 16.
- If you claimed the exemption at an earlier job, tell HR the amount so the ₹25 lakh limit is applied correctly.
- If your employer didn't apply the exemption, you can still claim it in your income tax return.
- Large settlement with other income? Check whether you need to pay advance tax on the rest before 15 December or 15 March.
Leave encashment tax: questions
Is leave encashment taxable in India?
It depends on when you receive it. Encashment while you are still employed is fully taxable as salary. Encashment when you resign or retire is exempt up to a limit: fully exempt for central and state government employees, and up to the least of four limits (with a ₹25 lakh lifetime cap) for everyone else.
How is the leave encashment exemption calculated on resignation?
For private-sector employees it is the least of: the amount you received; 10 months of average salary; the cash value of your unused leave, counting no more than 30 days per completed year of service; and ₹25 lakh less any exemption you've claimed before. Average salary means basic pay plus DA (if it counts for retirement benefits) and turnover-based commission, averaged over your last 10 months.
Why does part of my leave encashment show as taxable in Form 16?
Usually because your employer paid encashment on gross salary, but the exemption is worked out on basic pay. In our example, 90 days paid on a ₹2,00,000 gross salary is ₹6,00,000, while the exemption is capped at the basic-salary value of ₹3,00,000. The difference, ₹3,00,000, is taxed as salary.
Can I claim the leave encashment exemption under the new tax regime?
Yes. It is an exemption on the nature of the payment, not a deduction under Chapter VI-A, so it is available whichever regime you choose. The new regime removes most deductions, but not this one.
Is the ₹25 lakh limit per employer?
No. It is a lifetime limit across all employers and years. If you claimed ₹8 lakh of exemption when you left a previous job, only ₹17 lakh remains. Tell your new employer about earlier exemptions when you eventually leave, so TDS is worked out correctly.
What changed with the Income-tax Act, 2025?
From tax year 2026-27 the new Act replaces the 1961 Act, and the exemption moves out of section 10(10AA) under a new section number. The rules, the least-of-four formula and the ₹25 lakh limit carry over unchanged, so the calculation on this page still applies.
Is leave encashment paid to family after an employee's death taxable?
No. Leave salary paid to the legal heirs of a deceased employee is not taxable in their hands.
Methodology and limits
Rules come from the Income Tax Department's leave encashment guidance and the government's notification raising the limit to ₹25 lakh, cross-checked with tax guides that reflect the Income-tax Act, 2025. Checked in September 2026.
The example applies the least-of-four formula to an illustrative basic salary with no dearness allowance or commission. Your exemption depends on your actual salary history, leave records and earlier claims. This is general information, not tax advice.