Generally, all employees are eligible for a certain amount of paid time off each year. Paid time off is an integral part of the incentives offered by employers to join this company. The income tax laws grant an exemption for the cashing of these paid holidays in part or in full. Let’s discuss in detail.
Different types of leave and receipts
Leave to which an employee is entitled can be of different categories to meet specific needs such as sick leave in case the employee falls ill, occasional leave to deal with emergencies as well as to meet demands at home and privileged holidays to spend time with family members on vacation or simply at home. Instead of breaking up the blanket vacation entitlement in these categories, some employers allow a few days of paid vacation as consolidated vacation. One cannot carry over unused sick leave and casual leave, but they are generally allowed to carry over preferred leave.
Even some organizations have an overall cap on the number of days off one can carry over and unused carryover days expire in case the number is exceeded. On deferred leave, some employers allow you to cash out part of your deferred leave, but others do not allow any cashing.
The cashing out of leave is authorized during the term of employment as well as at the end of employment. An employee can leave an organization either when reaching retirement age or can resign before reaching mandatory retirement age.
Collection of leave upon departure
The amount received on vacation cashing by all government employees, whether they work for the central government or a state government, is fully exempt in their hands without any monetary limit or restriction on the number of vacation days. cashed. This exemption is available whether the employee leaves the public service when he reaches retirement age if he resigns before retirement age.
For those who do not work in government departments, there are restrictions up to which an employee is entitled to obtain an exemption for cashed leave. For these employees, there is an overall limit of ten months of leave regardless of the duration of the service leave, the receipt of which is exempt. In addition to the limitation on the number of days, there is an overall ceiling of ₹3 lakh in monetary terms up to which amount of leave encashment is exempt.
Please note that the restriction relates to the exemption and not to an employee’s right to cash out of leave. Thus, in the event that your employer authorizes you to fully cash in the leave remaining to your credit at the time of your retirement, you will have to pay tax on the excess amount which gives rise to the right to exemption. For the calculation of the exemption, only the salary received by an employee during the last ten months at the time of his retirement/resignation is taken into account.
It may be worth noting that, although employees working in public companies are entitled to full exemption from gratuity claims, no such absolute exemption is available for the cashing out of time off to them. So, people working in various government departments such as railways, government hospitals, revenue department, etc. are entitled to full exemption for vacation cashing, but at the same time, employees of municipalities, public sector companies such as banks, Indian life insurance company and other government owned companies are entitled to the cashing of leave for only ten months of salary and that too within the limit of ₹3,000,000.
The above exemption is also subject to a condition according to which the right to acquired leave for an employee must be limited to thirty days of leave for each year of service rendered with the same employer. Thus, in the case where the employer grants you a privileged leave beyond thirty days for each year of service, the exemption for cashing in the leave accumulated at the time of retirement is not at all available. In practice, almost all employers limit privileged leave to only thirty days for each year of service.
The amount of vacation cash-out waiver available to each employer, but available for the duration of your employment with one or more employers. Thus, if you have already requested an exemption for the collection of leave in the past, the amount of the exemption available to you would be limited to ₹Rupees 3 lakh reduced by the exemption already claimed earlier.
Collection of leave during the period of service
Some employers do not let their employees accrue vacation beyond a certain number of days, but they do allow employees to receive partial cashout of accrued vacation during their service period. With respect to tax law, the vacation cash-out exemption is only available where the cash equivalent of accrued vacation is paid to the employee upon leaving employment. However, such a tax exemption is not available for leave cashed in while maintaining employment with the same employer.
Balwant Jain is a tax and investment expert and can be contacted at [email protected] and @jainbalwant on Twitter.