Can retirees claim enhanced ₹25L leave encashment exemption for pre-2023 years? ITAT ruling explained

Retirees who earlier received only ₹3 lakh in leave encashment tax exemption before 2023 may now qualify for relief. The Income Tax Appellate Tribunal (ITAT), Chennai, ruled in a recent order that the enhanced ₹25 lakh exemption limit, introduced on 24 May 2023, can be applied retrospectively.

In its 12 June 2026 order, the ITAT held that both PSU (public-sector undertaking) and private-sector retired employees can benefit from the higher exemption limit, including those who had already paid tax on leave encashment exceeding ₹3 lakh.

The Central Board of Direct Taxes (CBDT) has clarified in its 2023 notification that the higher exemption applies to earned leave credited at the time of retirement, whether on superannuation or otherwise.

What led to ITAT’s ruling on leave encashment?

The ITAT ruling arose from the case of Vattikundala Prabhakara Rao, a retired ONGC employee, who received ₹19.05 lakh as leave encashment on superannuation during FY 2019-20,

While filing his income tax return (ITR) for AY 2020-21, Rao claimed the full amount as exempt under Section 10(10AA)(ii) of the Income-tax Act, 1061. However, the Centralised Processing Centre in Bengaluru restricted the exemption to ₹3 lakh and taxed the remaining amount.

Rao appealed, but the Commissioner of Income Tax Appeals dismissed his claim, holding that “exemption to the extent of ₹3,00,000 is only available to the assessee unless the said limit is raised by Central Government by any notification, which has not been done so far.”

The assessee's appeal before the ITAT was delayed by 1,023 days. However, the Tribunal condoned the delay, observing that the assessee had been "honestly and obediently waiting for any final order from any court" after the Delhi High Court issued notice to the government in the Kamal Kumar Kalia case on 8 November 2019, challenging the ₹3 lakh exemption cap.

According to an Upstox report, the Revenue's counsel argued that the enhanced exemption limit applied only from 1 April 2023, and therefore could not benefit the assessee for AY 2020-21. The assessee's counsel, however, argued that the notification was “beneficial and curative” in nature.

The counsel also pointed to the explanatory memorandum, which said no person would be adversely affected by the change.

ITAT rules in assessee's favour

Ruling in the Rao's favour, the ITAT observed that the increase in the exemption limit from ₹3 lakh to ₹25 lakh was a “significant upward revision” after nearly two decades and that the change was intended to bring the benefit available to non-government employees in line with that available to government employees and remove the disparity between the two.

The ITAT further said, "It is a settled principle that provisions which are beneficial in nature and intended to remove hardship are to be construed liberally and, in appropriate cases, applied retrospectively, particularly where no vested right of the Revenue is adversely affected".

The Tribunal noted that the explanatory memorandum to the notification stated: "It is hereby certified that no person is being adversely affected by giving retrospective effect to this notification".

The ITAT found "considerable force" in the assessee's contention that denying the enhanced exemption to employees who retired before the notification date would create "an unjust and artificial distinction between similarly placed employees retiring before and after the date of notification, which would defeat the very purpose of the amendment".