Reviewed by Finin2min Editorial Desk · Last reviewed 12 August 2026
Estimate section 10(10AA) exemption using employee category, average salary, eligible leave and remaining lifetime ceiling.
Estimate leave-encashment exemption
Indicative tax result
Estimated exemption
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Estimated taxable amount
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Non-government statutory test
Amount
Actual receipt
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10 months’ average salary
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Cash equivalent of eligible leave
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Remaining lifetime ceiling
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Income-tax Act, 2025 note: The leave encashment exemption discussed above is cited as Section 10(10AA) for FY 2025-26 and earlier. Under the Income-tax Act, 2025 (effective FY 2026-27), this moves into Schedule II of the new Act rather than a numbered section. Section numbering note: This page uses Income-tax Act, 1961 terminology for AY 2026-27 references. If applying the Income-tax Act, 2025 for a later year, verify the corresponding provision and exact wording from the official Gazette or Income Tax Department before citing a section number.
How This Is Calculated
For non-government employees, leave encashment received at retirement/resignation is exempt under Section 10(10AA) up to the least of: actual amount received, 10 months' average salary, cash equivalent of leave standing to credit (capped at 30 days per year of actual service), and the government-notified lifetime cap of ₹25,00,000 (raised from ₹3 lakh in Budget 2023). Leave encashment received by government employees is fully exempt with no cap.
Frequently Asked Questions
What is the maximum tax-exempt leave encashment amount?
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For non-government employees, the exemption is capped at ₹25,00,000 over an employee's lifetime (across all employers) — this limit was raised from ₹3,00,000 in Budget 2023. The actual exempt amount is the lowest of four figures: amount received, 10 months' average salary, leave-days cash equivalent (capped at 30 days/year of service), and this ₹25 lakh cap.
Is leave encashment fully tax-free for government employees?
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Yes. Leave encashment received by central and state government employees at retirement is fully exempt from tax under Section 10(10AA), with no monetary cap.
Is leave encashment received during employment taxable?
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Yes. Leave encashment received while still employed (not at retirement, resignation or termination) is fully taxable as salary income, without the exemption that applies to encashment at the end of employment.
For a non-government employee receiving leave encashment on retirement/resignation, the old-Act exemption is the least of actual receipt, ten months’ average salary, eligible leave cash equivalent and the remaining notified lifetime ceiling. The notified monetary ceiling is ₹25 lakh. Government retirement treatment and in-service encashment differ.
For AY 2026-27 use the Income-tax Act, 1961 terminology; for Tax Year 2026-27 use the Income-tax Act, 2025/Schedule II mapping. Keep leave ledger, salary history and prior-exemption evidence.
Input integrity
Use source documents rather than approximate memory.
Confirm period, units, tax regime/category and sign conventions.
Test zero, threshold and just-above-threshold cases where relevant.
Output interpretation
Separate arithmetic output from legal eligibility/classification.
Preserve assumptions and the official-source date.
Use the linked detailed guide for exceptions and evidence.
Reviewed 22 August 2026. Always test later amendments, corrigenda and portal implementation before a live filing or transaction.
Methodology, assumptions and sources
Scope: Computes leave encashment amount and the income-tax exemption available under Section 10(10AA), differentiating treatment during employment, on retirement/resignation for government vs non-government employees.
Calculation logic
Leave encashment amount = Unutilised leave days (per the entitlement/accrual policy) × Daily salary rate (average salary basis, typically the last-10-months average for retirement encashment, per the standard convention).
Tax exemption on retirement/resignation: for a government employee, leave encashment is fully exempt; for a non-government employee, exemption = lower of (leave encashment received, 10 months' average salary, cash equivalent of leave standing to credit subject to a maximum of 30 days per year of completed service, or the currently prescribed monetary ceiling — a four-way lower-of test).
Leave encashment received DURING employment (not at retirement/resignation) is fully taxable as salary income for both government and non-government employees, with no Section 10(10AA) exemption available — the calculator applies this distinction based on the encashment scenario selected.
Inputs and assumptions
The monetary ceiling for non-government employee exemption is cumulative across an employee's entire career (similar to the gratuity lifetime limit) — the calculator flags this cumulative nature, computing the exemption for the single employment/encashment event entered.
'Average salary' for this computation follows the specific 10-month-average convention (basic + DA forming part of retirement benefit) prescribed for this exemption, not necessarily the last-drawn salary used for other computations like gratuity.
Exclusions and edge cases
Leave encashment received by the legal heirs of a deceased employee is fully exempt from tax regardless of the above ceilings, per a specific carve-out — the calculator applies this exemption where the scenario is indicated as a death-related payment.
Does not itself track the employee's leave-accrual balance history — the days-to-encash figure must be entered by the user based on their employer's leave records.