Retired PSU employee faces ₹2 lakh tax demand over Form 16 omission; ITAT Pune grants relief

A retired PSU employee got relief from the Income Tax Appellate Tribunal (ITAT), Pune, after tax authorities denied his leave encashment exemption solely because it was not reflected in his Form 16.

Explaining the ruling on X, TaxBuddy founder Sujit Bangar mentioned that the ITAT held the exemption under Section 10(10AA) and it does not depend on whether the employer reflects it in Form 16.

Why did the tax department reject the claim?

The case involved Bharat Harisingh Shengar, an employee of Maharashtra State Power Generation Company Ltd, who retired on 31 January 2020. Upon retirement, he received ₹8.49 lakh as leave encashment.

According to Bangar, the employee claimed exemption for the leave encashment under Section 10(10AA) while filing his income tax return. He also claimed gratuity exemption under Section 10(10) and declared a total taxable income of ₹4.67 lakh, based on the actual receipts rather than relying solely on Form 16.

However, the Assessing Officer rejected the leave encashment exemption because the employer's Form 16 did not mention the exempt amount.

As a result, the entire ₹8.49 lakh was treated as taxable income, increasing Shengar's assessed income to ₹13.17 lakh and resulting in a tax demand of more than ₹2 lakh.

Bangar explained the sequence of events in his post, mentioning, “Employer's Form 16 did not show the exemption. Tax officer denied the entire ₹8.49 lakh claim, reassessed income at ₹13.17 lakh, and issued a tax notice for over ₹2 lakh.”

The first appellate authority, the Commissioner of Income Tax (Appeals) [CIT(A)], also upheld the tax officer's view despite the taxpayer providing relevant documents.

“CIT(A) confirmed the disallowance and did not consider his retirement order, leave slip, and bank statement,” Bangar noted, calling it the taxpayer’s second setback.

What did ITAT Pune's ruling say?

The taxpayer approached ITAT Pune, which considered the supporting documents and granted relief in his favour.

According to Bangar, “Section 10(10AA) exemption is statutory, not dependent on Form 16.” The Tribunal also relied on the 2025 ITAT Delhi ruling in the case of Shyam Sunder Sahni, a Canara Bank retiree.

Emphasising the significance of the ruling, Bangar wrote, “The key ruling: Section 10(10AA) exemption is a statutory right. It depends on the character of the receipt (leave encashment on retirement), not on whether your employer's Form 16 shows it or not.”

In other words, Form 16 is only a tax deduction certificate issued by the employer and cannot override a taxpayer's statutory entitlement.

What taxpayers should learn?

The ruling serves as an important reminder for salaried employees and retirees that Form 16 should not be treated as the sole basis for claiming tax exemptions.

Bangar advised taxpayers to keep documents such as the retirement or resignation order, leave encashment statement or full-and-final settlement letter, and bank statements showing receipt of the amount.

He further noted that if a tax notice is issued, taxpayers should pursue the appellate process with supporting documents and rely on the legal provisions under Section 10(10AA).

He also referred to CBDT Notification No. 31/2023, under which the maximum exemption limit for leave encashment for non-government employees was increased to ₹25 lakh for retirements on or after 1 April 2023.

Disclaimer: This is only for informational and educational purposes. Please consult a qualified tax expert for the latest tax laws and regulations.