LEAVE ENCASHMENT

For an employee of State or Central Government , any amount received as cash equivalent of Leave Salary at the time of super annuation / retirement is exempt from tax to the extent of 3 Lakhs. For other than the Government Employees least of the following is applicable :

(1)  The earned leave entitlement con not exceed 30 days for   every year of actual service or

(2)  10 months average salary or

(3)  Actual leave encashment received at the time of retirement, or exempted amount specified by the Government (3 lakhs)

Salary in arrears / advance, received in lump sum, is liable to tax in the year of receipt. Relief can be obtained for salary arrears u/s 89(1) of the Income Tax Act.

Method of Calculation to obtain relief

a)  Calculate the tax on total income of the previous year in which additional salary was received.

b)  Calculate the Tax on total income as reduced by additional salary of the previous year.

c)  From the amount arrived at...

     (i) deduct the amount arrived at

     (ii) to arrive at tax on additional salary received.     

d)  Ascertain the previous years to which the additional salary relates. Add the amount of additional salary to the total income of such years.

e)  Calculate the Tax on total income as increased by the relevant additional salary in respect of each of such previous years.

f)   Calculate the tax on the total income without the additional salary of each of the said previous years.

g)  From amount obtained at ...

   (i) deduct the amount arrived at

   (ii) to calculate aggregate tax on additional salary.

h)  The relief is the difference of (c) and (g)