Author : CA. Ajay Khandelwal
(हिंदी में पढ़ने के लिए यहाँ क्लिक करें https://www.happyhealthysociety.com/leave/)
There remains a big confusion in the minds of a large number of newly retired employees about taxability of Leave Encashment. Everyone wants to claim full exemption of income tax on leave encashment received on retirement.
“The govt. has increased the limit vide CBDT notification dated 24.05.2023 to Rs. 25,00,000/- with effect from 01.04.2023. Therefore, only the persons retiring on or after 01.04.2023 will get benefit”
Actually, exemption of leave encashment on retirement is governed by Section 10(10AA) of Income Tax Act, 1961, relevant portion of which is reproduced below :
“10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included—
(10AA)(i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ;
(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government.“
Only Govt. Employees are Eligible for full Exemption
Thus, it is very clear that payment of leave encashment on retirement is fully exempt only in case of govt. employees (Central/ State govt.). For others, the exemption is restricted to the limit fixed by Central Govt. in Official Gazette. The limit upto 31.03.2023 was Rs. 3,00,000/- fixed vide Gazette notification No. S.O. 588(E), dated 31st May, 2002 applicable for employees retiring on or after 01.04.1998. The limit has been increased to Rs. 25,00,000/- vide Gazette notification no. 31/2023/F. No. 200/3/2023-ITA-I dated 24.05.2023, applicable for employees retiring on or after 01.04.2023.
Therefore, non-govt. employees cannot take full exemption. They can take maximum exemption of Rs. 25,00,000/- and have to pay tax on the balance amount of leave encashment. The recent notification clearly says that it will become effective from 01.04.2023. Therefore, for the employees who retired before 01.04.2023, the limit of Rs. 3 lacs only will apply.
What about PSU Employees including Bank Employees
There is a big confusion that employees of PSU and banks are govt. employees or not. Employees of Govt. Departments are govt. employees but employees of PSUs are not govt. exmployees. There is a difference between govt. department and PSU or Govt. company. Govt. departments are completely owned and managed by govt. and usually come under the direct control of some ministry. For example, Income Tax Deptt., Police Deptt., Deptt. of Central Excise and Customs, Deptt. of Posts, Deptt. of Defence, Govt. Schools and Colleges, etc. Whereas, PSU or Govt. company refers to a company incorporated under Companies Act and in which 51% or more of paid up capital is held by govt. Eg. Coal India Ltd., HPCL, BPCL, ONGC, SAIL, BHEL, Nationalized Banks, etc. The employees of PSUs don’t enjoy all those facilities which the employees of govt. departments enjoy. For Example : Rajasthan State Electricity Board was a govt. department and its employees were called govt. employees. But, when it was converted to Rajasthan Rajya Vidyut Utpadan Nigam Ltd (RVUNL), it ceased to remain a govt. deptt., rather, became a govt. company or PSU. So, its employees can’t be called govt. employees. Similar is the case with BSNL.
Effects of Wrongly Claiming full exemption
Now, what can happen if a non-govt. employee has taken full exemption of leave encashment. Firstly, one should see if in Form 16, exemption of leave encashment of Rs. 3,00,000/- only has been given. So, in this case, if full exemption is claimed in ITR, the ITR will mismatch with Form 16. Since, Form 16 is generated online and Income Tax Deptt. has complete information of data filled in Form 16, they can easily find that income has been mis-reported. Though, some assessees may get refund, because, there is a system of self-assessment and ITR is processed on the basis of self-declaration of assessee. But, this doesn’t mean that after processing of ITR and getting assessment order and refund, assessee is free. Still, assessee may get notice from Income Tax Deptt. in future.
Penalty for under-reporting of income
Here claiming full exemption amounts to under-reporting of income on account of misreporting thereof and penalty will be 200% of the amount of tax payable on under-reported Income as per Section 270A of Income Tax Act,1961. For Example, If Taxable income was Rs. 30,00,000/- after claiming full exemption of leave encashment of Rs. 10,00,000/-, the assessee saved Rs. 218400/-. But, if notice comes in future, he will have to pay not only the tax saved Rs. 218400/-, but also a penalty of Rs. 436800/- alongwith interest on tax for the period upto the date of assessment.
|Full exemption of Rs. 1000000 claimed||Rs. 300000 exemption claimed|
|Tax Saved on Leave Encahsment||312000/-||93600/-|
|Under reported Income||700000/-||NIL|
|Tax Payable if notice came||218400/-||NIL|
|Interest Payable on Tax||Depending on date of notice||NIL|
|Penalty u/s 270A||436800/-||NIL|
Further, if it is treated by IT deptt. as willful attempt to evade tax, then assessee may be punished with rigorous imprisonment for 3 months – 2 years and a separate fine in terms of Section 276C of Income Tax Act, 1961.
Therefore, in public interest, it is suggested to the retirees not to get misguided from others. If govt. had any mood of increasing the limit from back date, it would have amended the provision in Union Budget 2021. A huge amount is already received at the time of retirement and they should not go for saving a small amount of tax knowingly that it is wrong. Age after retirement should be age of peaceful happy and tension-free living.
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Disclaimer : The above post has been prepared to share the scope and implications of Section 10(10AA) of the Income Tax Act, 1961. Though every effort has been made to avoid errors or omissions in this document yet any error or omission may creep in. Therefore, it is notified that I shall not be responsible for any damage or loss to any one, of any kind, in any manner therefrom. I shall also not be liable or responsible for any loss or damage to any one in any matter due to difference of opinion or interpretation in respect of the text. On the contrary it is suggested that to avoid any doubt the user should cross check the correct law and the contents with the notified / gazetted materials.