How Leave Encashment Works
Under the Group Leave Encashment Schemes, employers pay a yearly premium on behalf of the employees. Leave encashment due to the employee depends upon the leaves to his credit and his last drawn salary. On the exit of the employee, he is paid his due from the fund of the scheme, accumulated from the annual contribution by the employer.
Eligibility and Scheme Coverage
· Leave Encashment benefit can be provided by the employers in addition to other retirement benefits, to employees in the age group of 18 to 65 years.
· According to the Accounting Standard (AS-15) of January, 1995 and amended Section 209 (3) of Companies Act, 1957, it has become necessary for employers to provide for the liability of leave encashment facility available to employee in the annual books of accounts.
· On death or resignation of the employee, the leave encashment would be paid from the fund of the scheme maintained with the fund manager to the employee, or his beneficiary.
Under Section 10(10AA) of the Income Tax Act,
· For Government employees, the leave encashment benefits received at the time of retirement are tax free.
· For non- Government employees, leave encashment benefits are exempt from taxes subject to the least of the following amounts
· Rs 3 lakh
· Ten months' average salary - Average salary implies the average of the salary drawn during the last ten months prior to retirement.
· Cash equivalent of the leave due at the time of retirement
· Leave encashment actually received at the time of retirement
For the employer
· The actual payment made towards leave encashment is allowed to be treated as a business expense.