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Tax Exemption & Section 10(10AA) (FY 2026-27)

Leave Encashment Tax Exemption: Section 10(10AA) Guide (2026)

Maximize your exit payout: Complete breakdown of the enhanced ₹25,00,000 lifetime tax exemption on earned leave encashment on resignation or retirement.

Quick Summary: Leave Encashment Exemption (FY 2026-27)
  • Statutory Exemption Cap: Enhanced from ₹3 Lakh to ₹25,00,000 for non-government private-sector employees under Section 10(10AA)(ii).
  • Calculation Rule: Exemption is limited to the least of: actual leave encashment received, ₹25,00,000 cap, or 10 months' average basic salary.
  • During Employment vs On Exit: Leave encashment received *during* ongoing service is 100% taxable. It is only exempt when received upon resignation, retirement, or termination.

Statutory Leave Encashment Exemption Formula

Exempt Amount = Minimum of: [1. Actual Encashment Received, 2. ₹25,00,000, 3. 10 × Average Monthly Basic & DA of Last 10 Months, 4. Cash Equivalent of Leave Balance capped at 30 days/year]

Leave Encashment Exemption Simulation (15 LPA CTC / 8 Years Service)

Line Item / Component Amount Calculation Basis & Remarks
Accumulated Earned Leave (EL) Balance 45 Days Unavailed earned privilege leaves
Average Monthly Basic Salary (Last 10 Mos) ₹50,000 Basic pay component
Daily Basic Salary Rate ₹1,666.67 ₹50,000 / 30 days
Total Gross Leave Encashment Payout ₹75,000 45 days × ₹1,666.67
Section 10(10AA) Statutory Exemption Cap ₹25,00,000 Budget FY 2026-27 enhanced cap
10 Months Average Salary Limit ₹5,00,000 10 × ₹50,000
Taxable Leave Encashment Amount ₹0 (100% Tax Free) Full ₹75,000 is completely exempt from income tax

Earned Leave (EL) vs Casual/Sick Leave Encashment

Under Indian labor law and corporate HR policies, only Earned Leaves (Privilege Leaves - PL) are eligible for accumulation and encashment upon exit. Casual Leaves (CL) and Sick Leaves (SL) lapse automatically at the end of each calendar year and cannot be monetized or encashed during FnF settlement.

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Frequently Asked Questions

Is leave encashment tax-free under the New Tax Regime in FY 2026-27?

Yes. Section 10(10AA) exemption on leave encashment is explicitly preserved and fully available under both the New Tax Regime and the Old Tax Regime.

Is the ₹25 Lakh exemption limit per company or a lifetime limit?

The ₹25,00,000 exemption limit under Section 10(10AA) is a cumulative lifetime ceiling across all employers in an individual's career. If you claimed ₹5 Lakhs from Employer A, only ₹20 Lakhs exemption remains for future employers.

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