Dear Sir/madam,
I want to know the current calculation of EL Encashment, is :
Basic /30days*nos. of ELs or
Basic/26dyas*Nos. of ELs?
Waiting for prompt reply,
Thanks & Regards
Anumod

Dear Anumod,

Will explain with an example:

Example:- Mr x was an employee with ABC Ltd. His basic is 10000 Per month, 20% of basic forms the part of retirement. Date of joining 1/oct/1987 and date of retirement 16/11/2007. Leave encashment received is 120000 for 300 days, leave entitled 40 days per year. How to calculate EL and how much tax to be paid?

Here is the rule for determining the tax liability in case of leave encashment:

For non-Government employees, leave encashment is exempt up to the minimum of the following:

a) Rs. 3,00,000

b) The average of the salary drawn during the last ten months before retirement

c) Cash equivalent of the leave due at the time of retirement (not exceeding 30 days for each year of actual service)

d) Leave encashment actually received at the time of retirement

Here, Salary includes basic salary and dearness allowance, if any.

An amount over and above this (minimum of a, b, c and d) is treated as salary, and is clubbed with that years income.

In our example,
a) Rs. 3,00,000
b) Average salary of last 10 months would be Rs. 10,000 * 10 = Rs. 1,00,000
c) Suppose, he has a leave balance of 120 days.

Then, Leave encashment= (Rs. 10,000 / 30) * 120 = Rs. 40,000

d) Leave encashment actually received = Rs. 1,20,000

The minimum of a, b, c and d is Rs. 40,000.

Thus, Rs. 40,000 would be exempt from Income Tax (IT), and the remaining Rs. 80,000 would be clubbed with that years income and taxed according to the applicable slab.


Now, if Mr. A's salary was Rs. 40,000:

a) Rs. 3,00,000

b) Rs. 40,000 * 10 = Rs. 4,00,000

c) (Rs. 40,000 / 30) * 120 = Rs. 1,60,000

d) Rs. 1,20,000

The minimum of a, b, c and d is Rs. 1,20,000.

Thus, the entire Rs. 1,20,000 received would be exempt from Income Tax (IT).

Please not these other things as well:

* Leave encashment money received by Government employees at retirement is fully exempt from income tax (That is, there is no cap of Rs. 3,00,000)

* Leave encashment while the person is still in service is fully taxable (clubbed with that years income)

* Encashment of sick leave is fully taxable (clubbed with that years income)

regards,
Runu