In this article,I have tried to explain the treatment of leave salary and provident fund in income tax act.
when employee receives cash equivalent in respect of earned leave(leave not taken) , it is called leave salary.
treatment of leave salary received by government employees and non government employees are different.
Leave salary earned by any employee during the period of service is taxable.
Leave salary received by government employees at the time of retirement is exempt.
Leave salary is exempt from tax up to least of following.
- Rs. 3,00,000
- Amount actually received.
- cash equivalent of the leave to the credit of the employee at the time of retirement.
- 10 month’s salary on the basis of last 10 month’s average salary.
How to calculate cash equivalent?
- Cash equivalent should be based on last 10 months average salary. while calculating average salary consider salary of the month of retirement also.
- 30 days credit for each completed year of service should be given.
- salary means salary, DA and commission as a percentage of turnover achieved by the employee.
Mr. Anup receives Rs. 52000 as leave salary at the time of retirement on 31st July, 2013.
His basic pay was 4000 p.m. from 1st April, 1988. Leave to his credit is 24 months on the basis of 45 days entitlement of leave for each completed year of service.
Exemption will be least of following
- Rs. 3,00,000
- Rs. 52,000
- Leave entitled 25 years of service *30 days= 25 months
Leave taken 25 years*1.5 month-24 months= 13.5 months
leave earned = (25 months-13.5 months)= 11.5 months*4000=46000
4. Average salary of 10 months =4000*10 = 40,000
Exemption is Rs. 40,000 and taxable leave salary is Rs. 12,000.