Retiree claimed tax exemption on ₹19 lakh leave encashment, got a tax notice instead; here's what happened next

A retired ONGC employee has won a tax dispute after the Chennai bench of the Income Tax Appellate Tribunal (ITAT) allowed him to claim tax exemption on the full ₹19.06 lakh he received as leave encashment at the time of retirement, according to a report by The Economic Times.

Balasubramanian Venkatachalaperumal retired from Oil and Natural Gas Corporation (ONGC) in FY20 and received ₹19.06 lakh as leave encashment. While filing his income tax return on October 29, 2021, he claimed tax exemption on their entire amount under Section 10(10AA)(ii) of the Income-tax Act and reported a total taxable income of ₹31.62 lakh.

The income tax department, however, did not agree with his claim and sent the retiree a notice. It also restricted his leave encashment exemption at ₹3 lakh and added the remaining amount to his taxable income, making it ₹47.68 lakh.

This entire ordeal triggered a dispute over how much of the leave encashment amount could be claimed as tax-free.

Retiree argued PSU employees deserve a higher exemption

Venkatachalaperumal challenged the income tax department's order before the Commissioner of Income Tax (Appeals) on November 26, 2021. He argued that public sector undertaking (PSU) employees should get the same benefit as government employees for leave encashment exemption.

Accordingly, he argued that the maximum tax exemption of ₹3 lakh, which was fixed in 2002, should be increased or adjusted to align with the ₹25 lakh tax exemption received by government employees, the news publication reported.

The CIT (Appeals), however, rejected his plea, holding that a PSU employee cannot be treated as an employee of the central or state government for the purpose of claiming the higher exemption under Section 10(10AA)(i).

While the authority agreed that Venkatachalaperumal was eligible for exemption under Section 10(10AA)(ii), it denied his claim for the more favourable treatment available to government employees.

Unhappy with the decision, he took the matter to the Chennai bench of the Income Tax Appellate Tribunal (ITAT).

ITAT Chennai rules in the retiree's favour

On May 4, 2026, ITAT Chennai ruled in his favour. He finally won the case as ITAT Chennai granted him increased tax exemption limit under Section 10(10AA)(ii) for leave encashment received on retirement.

The tribunal observed that increasing the exemption limit from ₹3 lakh to ₹25 lakh through Notification No. 31/2013 was a major revision after nearly two decades, the news publication noted in the report. It said the move aimed to reduce the gap between government and non-government employees.