Received leave encashment from two employers? Know how tax exemption will be calculated in AY 2025-26

The income-tax rules provide tax exemption on leave encashment or leave salary to salaried employees on retirement, including those in the private sector, up to a certain extent.

This article explains how tax exemption on leave encashment will be calculated, particularly for employees who have received leave encashment from two employers. This could be either in the financial year 2024-25 (AY 2025-26), or from one employer in the current financial year and from another in any previous financial year.

But first, let's have a look at the tax rules regarding tax exemption on leave encashment upon retirement.

Through a notification dated May 24, 2023, the Central Board of Direct Taxes (CBDT) increased the tax exemption limit on leave encashment to ₹25 lakh for non-government employees. However, there are certain conditions attached to the tax exemption limit.

• Period of earned leave standing to the credit in the employee's account at the time of retirement x average monthly salary

• Average monthly salary x 10 (i.e., 10 months' average salary)

• Maximum amount as specified by the central government (i.e., ₹25,00,000).

• Actual leave encashment received at the time of retirement.

What happens if an employee receives leave encashment from two employers?

The maximum exemption amount cannot exceed the ₹25 lakh limit if an employee has received leave encashment from two employers in the same financial year.

If an employee has availed leave encashment exemption from another employer in a previous financial year then the ceiling of ₹25 lakh will be reduced by the amount already claimed when seeking tax exemption against leave salary from the current employer.

"If an employee receives leave salary from more than one employer in the same year, then the maximum amount of exemption under section 10(10AA)(ii) of the Income-Tax Act, 1961 cannot exceed the amount specified by the Central Government (i.e., ₹25,00,000)," the CBDT circular said.

"Where any employee has claimed exemption of leave salary under this section in any earlier year(s), then in case of such employee, the ceiling limit (i.e., ₹25,00,000) shall be reduced by the amount of exemption earlier claimed," it added.