New Tax Regime: Exemption limit rises, here’s how it will work for private sector employees

Leave Encashment Exemption under Old and New Tax Regimes: The Finance Ministry has notified a new rule for non-government employees that makes leave encashment up to Rs 25 lakh exempt from taxation. The exemption limit has been raised from Rs 3 lakh to Rs 25 lakh. Interestingly, the exemption will apply to taxpayers in both Old and New Tax Regimes.

While various deductions and exemptions are already available under the Old Tax Regime, the new leave encashment limit will provide some relief to private sector employees opting for the New Tax Regime, which does not provide many options for tax deductions and exemptions.

This article looks at how this exemption limit will work for salaried employees in the private sector.

According to Archit Gupta, Founder and CEO of Clear (formerly ClearTax), the leave encashment exemption limit is once in a lifetime exemption.

The new limit for leave encashment exemption is Rs 25 lakh, which has been increased from the earlier exemption limit of Rs 3 lakh.

“Rs 25 lakh is the maximum lifetime limit irrespective of how many employers have allowed exemption in the same year or over multiple years. An individual can in aggregate claim a maximum of Rs 25 lakh exempt from taxes in their lifetime,” said Gupta.

For example, if an employee receives Rs 15 lakh as leave encashment, this amount will be fully exempt from taxation.

However, if after 10 years (or any number of years) the employee again receives another Rs 20 lakh as leave encashment, then only only Rs 10 lakh will be exempt for him/her. The employee will have to pay tax according to his/her slab on the balance of Rs 10 lakh.

Also Read:  CBDT notifies Rs 25 lakh Leave Encashment limit

“The exemption limit is cumulative, therefore the balance has to be paid according to the slab applicable,” said Gupta.

For Government employees, leave encashment has always been fully tax-exempt.

What the Finance Ministry said

“The tax exemption on leave encashment of non-government salaried employees (in respect of the period of earned leave at his credit at the time of his retirement, whether on superannuation or otherwise) was earlier upto a limit of Rs.3 lakh only under section 10(10AA)(ii) of the Income-tax Act,1961(the Act),” the Finance Ministry said in a statement on Thursday (May 25, 2023).

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“In pursuance to the proposal in the Budget Speech, 2023, by the hon’ble FM, the Central Government has notified the increased limit for tax exemption on leave encashment on retirement or otherwise of non-government salaried employees to Rs. 25 lakh w.e.f. 01.04.2023,” it added.