s.10(10AA) · ₹25 lakh exemption · non-government employees

Leave encashment — what stays tax-free

Unused leave paid out when you leave is taxable — except up to the least of four numbers. The ₹25 lakh ceiling (raised from ₹3 lakh in 2023) makes most payouts fully exempt.

The rule this tool applies

• On retirement or resignation, s.10(10AA) exempts the least of: (a) amount actually received; (b) ₹25,00,000 (lifetime, non-government); (c) 10 months' average salary of the last 10 months; (d) cash value of unused leave, counting at most 30 days of leave per completed year of service.
• Government employees (Central/State) — fully exempt.
• While still employed — leave encashed during service is fully taxable as salary (relief under s.89 may apply).
• "Salary" here = basic + DA (retirement-linked) + commission on turnover.

Worked example

Average salary ₹80,000, 300 unused days, 15 years, payout ₹9,00,000: (b) ₹25L; (c) ₹8,00,000; (d) 300 days is within 15 × 30 = 450, so 300 × (80,000 ÷ 30) = ₹8,00,000. Least is ₹8,00,000 exempt — ₹1,00,000 taxable as salary.

Edge cases to know

• The ₹25 lakh is a lifetime limit across all employers — earlier claims reduce it.
• Employer allows more than 30 days a year? The tax formula still caps at 30 — the extra is taxable even if paid.
• Legal heirs receiving encashment on an employee's death — not taxable in their hands.

Related tools

• Gratuity calculator — the other exit payment.
• Income tax calculator — add the taxable part to your salary.

Last verified: 18 September 2026 — s.10(10AA) formula; ₹25 lakh limit (Budget 2023) confirmed unchanged across three sources · Not tax advice.