Cash reward for not taking leaves from work: Govt hikes tax exemption on leave encashment

While announcing the Union Budget for the next fiscal year that starts April 1, Finance Minister Nirmala Sitharaman on Wednesday proposed to hike tax exemption on leave encashment on retirement of non-government salaried employees to ₹25 lakh from ₹3 lakh.

"The limit of ₹3 lakh for tax exemption on leave encashment on retirement of non-government salaried employees was last fixed in the year 2002, when the highest basic pay in the government was ₹30,000 pm. In line with the increase in government salaries, I am proposing to increase this limit to ₹25 lakh," Sitharaman said.

Leave encashment, which refers to the money received in exchange of period of leaves which was not availed by employee, is taxable based on when it is received.

“The slab for applicability of tax on leave encashment for retirees also has been enhanced to 10 lakhs. Highest tax rate of tax for individuals that are high earners also has been reduced from 42.74% to 39%. In general, IT returns are processed in 16 days as against 90 days earlier and refunds are under a day. This will put a whole lot of money in the hands of individuals which will then spur either savings or consumption,” said CA Aditya Sesh, Founder and Managing Director of Basiz Fund Service Private Limited.

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“Now I have come to what everyone is waiting for — personal income tax,” Sitharaman said while proposing to change the tax structure in new regime by reducing the number of tax slabs to 5 and increasing the tax exemption limit to ₹3 lakh. The finance chief said the new tax regime will now be the default tax regime, but that people can still opt to avail of the benefits of the old tax structure that allows more exemptions.

For pensioners, she announced extending the benefit of standard deduction to new tax regime. Each salaried person with an income of Rs. 15.5 lakh or more will benefit by ₹52,500.