Payroll & statutory · Updated September 2026
Leave encashment sounds like a single event, but it’s taxed very differently depending on when it happens. Encashed while you’re still employed, an annual “sell back your unused leave” arrangement, it’s fully taxable as ordinary salary. Encashed at retirement, resignation or termination, it qualifies for a real exemption under Section 10(10AA) of the Income Tax Act, and that exemption is where the actual complexity lives.
Government employees get full exemption on retirement, no ceiling. For everyone else, the exempt amount is the least of four figures: the actual amount received, 10 months’ average basic plus DA before leaving, the cash equivalent of unused leave capped at 30 days per completed year of service, and a statutory ceiling of ₹25,00,000. That ceiling comes from CBDT Notification No. 31/2023, dated 24 May 2023, effective from 1 April 2023, and it’s a lifetime aggregate across every employer, not a fresh ₹25 lakh at each job. Before this notification, the limit had sat at ₹3 lakh since 2002.
Death-in-service is a separate, more generous case: encashment paid to legal heirs is fully exempt with no cap at all, for government and non-government employees alike.
No. The Section 10(10AA) exemption applies only at retirement, resignation or termination. Encashment while still employed is added to salary and taxed at your normal slab rate.
No, it’s tracked as a lifetime aggregate across all employers you’ve claimed the exemption from, not a fresh allowance per job.
Usually not. Most Indian companies restrict encashment to earned or privilege leave and let unused casual or sick leave lapse, so the exemption calculation is really about earned leave specifically.
See our full guide to how leave encashment works, and calculate a specific payout with the Leave Encashment Calculator.