How is leave encashment taxed when an employee resigns in India?

Leave encashment received at the time of resignation or retirement is exempt from income tax for non-government employees up to a lifetime aggregate of ₹25 lakh under Section 10(10AA), a limit raised from ₹3 lakh effective April 2023. Government employees receive full exemption with no limit. Leave encashed during active service, by contrast, is fully taxable as salary.

For private-sector employees, the exempt amount is the least of four figures: the actual encashment received; the cash equivalent of accumulated leave at 10 months’ average salary; the ₹25 lakh statutory cap; and average monthly salary times the months of earned leave standing to credit (limited to 30 days per year of service). The ₹25 lakh cap applies across all employers in a lifetime, and the exemption is available under both the old and new tax regimes.