Gireesh Bhalla : Exemption of amount received by way of encashment of unutilised earned leave by retiring employees : [Section 10(10aa)]

Cash equivalent of leave salary received only at the time of retirement whether on superannuation or otherwise is wholly exempt in the case of Central or State Government employees.  For others, cash equivalent of leave salary received at the time of retirement whether on superannuation or otherwise is exempt subject to certain conditions and limits explained hereunder:

1)         Earned leave entitlement must not exceed 30 days for every year of actual service rendered by him as an employee from whose service he has retired.

2)         Earned leave so encashed must not be for more than 10 months.

3)         Leave salary must be based on average salary drawn by the employee during ten months immediately preceding his retirement.

4)         The sum so payable shall not exceed Rs. 3,00,000, where the employee retires after 01-04-1998;

5)         Even if non-Government employee has received the sum from different or in the same previous year, the ceiling limit stated in (4) above will be applied on all such payments put together if such payment received earlier had not been taxed.

“Salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

            It is important to note that under section 17(2), perquisites are classified as under:

i)          the value of rent free accommodation provided to the assessee by his employer [section 17(2)(i)];

ii)         the value of any concession in the matter of rent in respect of any accommodation provided to the assessee by his employer [section 17(2)(ii)];

iii)         the value of any benefit or amenity granted free of cost or at concessional rate to the following categories of employees:-

a)         a director of a company [section 17(2)(iii)(a)]

b)         an employee of a company who has substantial interest in the company, i.e.,  an employee who is the beneficial owner of at least 20% of the ordinary shares [section 17(2)(iii)(b)]; andany other employee whose income under the head “Salaries” exclusive of all non monetary benefits or amenities exceeds Rs. 50,000 in relation to the aggregate salary due to, or received by, an employee from one or more employers.  In other words, where the salary of any other employee is less than Rs. 50,000, the value of any benefit or amenity granted free of cost or at concessional rate will be exempt unless the benefit or amenity is of obligatory nature.