The four-condition least-of test
For non-government employees on retirement / resignation, the exempt portion is the smallest of:
The ₹25 lakh cap is a lifetime aggregate — if you've previously claimed exemption in earlier jobs, the unused balance is what's available now. Government employees get full exemption with no cap.
Worked example
Private employee, 20 years of service, average monthly salary ₹80,000, 180 unutilised leave days, encashment received ₹6,00,000.
- Avg daily salary = ₹80,000 ÷ 30 = ₹2,667
- Cond 1 = ₹6,00,000
- Cond 2 = ₹25,00,000 (cap)
- Cond 3 = 10 × ₹80,000 = ₹8,00,000
- Cond 4 = (30 × 20) × ₹2,667 ≈ ₹16,00,000 — but limited to actual unutilised days (180) × ₹2,667 ≈ ₹4,80,000
- Smallest = ₹4,80,000 exempt, balance ₹1,20,000 taxable as salary
FAQ
What about encashment during employment (not at retirement)?
Fully taxable as salary in the year received. The Section 10(10AA) exemption applies only at retirement, resignation, or death.
Can I get the exemption multiple times?
The ₹25 lakh cap is a lifetime limit — combined across all employers. If you used part of it in a previous job, only the unused balance is available now.
Does this include "earned" leave only?
Yes — only earned / privilege leave (typically 30 days/year accrual) qualifies. Casual leave (CL) and sick leave (SL) are usually not encashable per the Income Tax Act, though employer policies vary.