Leave encashment tax: ITAT grants SBI retiree Rs 9.53 lakh relief

A State Bank of India retiree has won tax relief on his entire Rs 9,53,763 leave encashment payment after the Income Tax Appellate Tribunal’s Jaipur bench applied the higher exemption ceiling introduced in 2023 to his 2020 retirement. The Economic Times reported that the tribunal ruled in favour of Chhaju on August 31, 2026, overturning an adjustment that had added about Rs 6.53 lakh to his taxable income.

Chhaju, who worked at SBI in Murlipura Scheme, Jaipur, claimed full exemption under Section 10(10AA). The Centralised Processing Centre in Bangalore restricted that claim to Rs 3 lakh—the ceiling applicable to non-government employees when he retired—and treated the balance as taxable. The Commissioner of Income Tax (Appeals) upheld the adjustment before Chhaju approached the tribunal.

Why the tribunal allowed the higher ceiling

The tribunal’s reasoning centred on the nature of the 2023 increase in the leave encashment exemption ceiling from Rs 3 lakh to Rs 25 lakh. It treated the change as a corrective measure rather than the creation of a new exemption.

According to the reported order, the power to revise the ceiling under Section 10(10AA)(ii) carried a continuing obligation to consider the limit applicable to Central Government employees. The tribunal noted that the Rs 3 lakh ceiling had remained unchanged since 2002 despite successive revisions in Central Government pay.

On that basis, the bench reasoned that denying the revised ceiling to an employee who retired shortly before the notification would preserve the disparity the revision sought to address. It found that Chhaju’s Rs 9,53,763 payment fell within Rs 25 lakh and that none of the provision’s other limits had been applied against him. The disputed addition was therefore removed.

Relief did not depend on government-employee status

The distinction between government and bank employment remains important. Retirement leave encashment received by Central or State Government employees is fully exempt, while nationalised-bank employees fall under the rules for non-government employees.

The report cited Kamal Kumar Kalia v. Union of India, a 2020 Delhi High Court case, for the position that nationalised-bank staff cannot claim the unrestricted exemption available to government employees.

The Jaipur bench also discussed Narender Singh Yadev v. ACIT, a 2023 coordinate-bench decision. In that case, full exemption had followed a finding, supported by a Gazette notification, that the employer was a government institution. Chhaju’s reported relief instead rested on the remedial character of the higher ceiling.

The outcome should therefore not be read as an automatic, unlimited exemption for all bank retirees. It is a reported tribunal ruling on Chhaju’s circumstances, including the finding that no other statutory limit had been applied against his claim.

How the exemption is normally calculated

Leave encashment is a cash payment for accumulated earned leave. Chartered accountant Suresh Surana explained in the report that, for non-government employees retiring under the revised ceiling, the exemption is restricted to the lowest of four amounts: the actual payment; the cash equivalent of eligible accumulated earned leave; 10 months’ average salary immediately before retirement; or Rs 25 lakh.

For the earned-leave calculation, entitlement is capped at 30 days for each year of actual service. The Rs 25 lakh ceiling is also an aggregate lifetime limit across employers, not a fresh allowance for every retirement payment. Earlier exemptions claimed reduce the ceiling available for a later claim.

Consequently, a payment below Rs 25 lakh is not necessarily fully exempt. If another statutory calculation produces a lower eligible amount, that lower figure governs. Leave encashed while an employee is still in service is fully taxable.

Reporting the payment in an income-tax return

Surana advised retirees to include leave encashment in Schedule Salary of the applicable income-tax return and disclose the eligible exemption separately in the designated exempt-allowances field.

Any amount exceeding the eligible exemption is taxable as salary in the year of receipt at the employee’s applicable slab rates; it does not attract a separate leave-encashment tax rate. Pranshu G, partner at Ashok Pranshu & Co, explained that the taxable portion is added to other income and can increase the retiree’s tax liability, including by affecting eligibility for the Section 87A rebate.