The centre on Wednesday proposed a massive hike in tax exemption on leave encashment of non-government salaried employees - to ₹25 lakh from ₹3 lakh. "... limit of ₹3 lakh for tax exemption on leave encashment on government salaried employees... was set in 2002 when government salaries were lower and is now being raised to ₹25 lakh," finance minister Nirmala Sitharaman said as she presented the union budget for 2023/24.
What is leave encashment
Basically, leave encashment is when employees in the organised sector are given money in exchange for periods of leave not taken in the year.
Most companies offer employees three kinds of leaves - earned, casual and sick. The latter two usually lapse if not availed while some companies allow their employees to carry forward earned, or privileged, leaves.
FULL COVERAGE | Nirmala Sitharaman presents 2023/24 union budget
This means if you have 10 days of earned leave (or leave with pay) available at the end of the year, you may add this to quota of earned leave for the next year.
However, even companies that allow leave to be carried forward permit it only to a certain threshold - either in terms of days or a certain time in the next year.
These can then either be lapsed or encashed, depending on company policy.
{{/usCountry}}These can then either be lapsed or encashed, depending on company policy.
{{/usCountry}}How does FM's new policy affect you?
The money received is taxable. This means it will be added to your taxable salary, and the applicable tax will be deducted by your employer on pay-out.
Earlier the exemption threshold was ₹3 lakh - meaning that if encashed leave was worth over that amount then it would be added to your salary for taxation
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The proposal to boost that threshold to ₹25 lakh - a nearly 734 per cent increase - represents potentially enormous savings for taxpayers.
Note that government employees - the proposal affects only non-government employees - will continue to enjoy full exemption on encashed leaves.
Why has this been increased?
The limit of ₹3 lakh was fixed in 2002 when Atal Bihari Vajpayee was prime minister and the highest basic pay in the government was ₹30,000 per month.
Other tax highlights in Budget 2023
The finance minister also outlined changes to income tax slabs - for those filing under the new tax regime - that will see rebate up from ₹5 lakh to ₹7 lakh. "Persons in new tax regime with income up to ₹7 lakh will not pay any tax."
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She also proposed changing the tax structure of the new regime by reducing the number of tax slabs to five and increasing the tax exemption limit to ₹3 lakh.
| Slab | Tax rate |
|---|---|
| 0 - ₹3 lakh | nil |
| ₹3 lakh - ₹6 lakh | 5% |
| ₹6 lakh - ₹9 lakh | 10% |
| ₹9 lakh - ₹12 lakh | 15% |
| ₹12 lakh - ₹15 lakh | 20% |
| ₹15 lakh and above | 30% |
The FM also extended standard deduction to the new tax regime. "Each salaried person with income of ₹15.5 lakh or more will benefit by ₹52,500," she said.
In a speech that lasted just under 90 minutes Sitharaman outlined seven priorities seen as the focus of the last year of the Modi government's second term. These included inclusive development and increased infra investment.