DIRECT TAXATION

Gyanamayee Panigrahi
Department of Management Studies
DIRECT TAXATION

Practice Sums in taxable leave salary

DIRECT TAXATION
Session Outline

• Practice Sums in taxable leave salary

DIRECT TAXATION
Basis of Charge (Sec 15)

Salary income is charged under the head “income from salaries”

either on accrual basis or receipt basis, which ever is earlier.
Basic Pay: It is the amount paid to employee as salary by the
employer. Basic pay is fully taxable.
Tax Treatment: Normally salary becomes due on the day of the
month in case of Banks and private sector employees; however
salary of Govt. Employees becomes due on the first day of the next
month. In case where salary becomes due on the last day of the
month, salary from April to March is computed. Whenever, salary
becomes due on the first day of the next month, salary from
March to February is computed
DIRECT TAXATION
Format for Computing Taxable Income From Salaries

Assessee: A.Y:
Residential Status: P.Y:
1. Basic Pay 12000-500-20000 Xxx
2. Dearness Pay/ Dearness Allowance Xxx
3. Bonus Xxx
4. Fees Xxx
5. Commission Xxx
6. Allowances Xxx
7. Perquisites Xxx
8. Provident Fund Xxx
9. Profit in lieu of salary Xxx
10. Pension Xxx
11. Gratuity Xxx
12. Encashment of leave salary Xxx
Gross Salary xxx
Deductions U/S 16 xxx
Net Salary or Income from Salary xxx
DIRECT TAXATION
Basis of Charge (Sec 15)

Encashment of leave by surrendering earned leave standing to the

employee’s credit is known as “encashment of leave salary”.
One year = 30days/ 1 month leave( Earned)

Leave Salary received during the service period

Govt Employees i.e. employees Non-Government employee i.e
of state or central Government other employees
Fully Taxable Fully Taxable

25 year = 25*1 = 25 months earned leave , Retirement

10 years = 10*1 = 10 months earned leave e Salary received during the se
DIRECT TAXATION
Encashment of Leave Salary [Sec10(10AA)]

Leave salary received at the time of retirement

Govt. Employee Non- Govt Employee

Least of the following is exempt from tax:

1. Leave Encashment actually received[ Service period
X(Actual earned leave- earned leave used) X last
FULLY TAX FREE drawn salary 45000
2. Leave salary as per IT Law (1 Month or Actual earned
leave, which ever is less) X Service Period – earned
leave used X average salary 39000
3. 10 Months average salary 38000
4. Maximum limit of 3,00,000
DIRECT TAXATION
Encashment of Leave Salary [Sec10(10AA)]

Format for calculation of leave salary encashment:

Particulars Amount Amount
Actual Leave Salary Received XXX
Less: Least of the following:
1. Leave Encashment actually received[
Service period X(Actual earned leave-
earned leave used) X last drawn salary XXX
2. Leave salary as per IT Law (1 Month or
Actual earned leave, which ever is less) X
Service Period – earned leave used X XXX
average salary XXX
3. 10 Months average salary XXX
4. Maximum limit of 3,00,000
Total Taxable Leave Salary XXX
DIRECT TAXATION
Encashment of Leave Salary [Sec10(10AA)]

Mr. Narasimha(resident) was a manager in a Private Company. He

sought pre mature retirement from service on 1st November 2019
after completing 25 years of service. His salary for 10 months
preceding retirement was 45,000. He had ten months leave to his
credit on the basis of 30 days per year which was approved and he
was paid 43,890 as salary. Compute the amount of encashment
exempt from tax for P.Y. 2020-21.
Service Period = 25years
Total Earned leave = 1*25= 25 months of EL Used : 25-7 = 18 Months
Salary for 10 months = 36900 ; Average Salary = 36900/10= 3690
For 7 months earned leave – 27300 as salary
 Particulars Amount Amount
DIRECT TAXATION
Actual Leave Salary Received 27,300
Encashment of Leave Salary [Sec10(10AA)]
Less: Least of the following:
1. Leave Encashment actually received[
Format for calculation
Service of leave
period X(Actual salary
earned encashment:
leave-
earned leave used) X last drawn salary 27,300
(1X (25-18) X 3900= 1*7*3900=27300
2 Leave salary as per IT Law
1*(25-18)X 3690 = 25,830
3. 10 Months average salary 36900
4. Maximum limit of 3,00,000 3,00,000 25830
(Exempted
Leave
Salary)
THANK YOU

Gyanamayee Panigrahi
Department of Management Studies
gyanamayee@pes.edu
+91 80 66186410