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FY 2025-26 / AY 2026-27. Section references are to the Income-tax Act, 1961. Check the rules for your income year before applying this guide to a later payment.
Start with the payment type and employer category. Then reconcile the leave record and earlier exemptions. The amount paid into your bank account does not by itself establish the exempt amount.
Estimate ordinary salary tax after identifying the taxable portion. The tool does not calculate leave-encashment eligibility or surcharge.
Which treatment applies?
| Payment | Treatment to check |
|---|---|
| Encashment during continuing service | Fully taxable salary |
| Qualifying retirement payment to a Central or State Government employee | Full exemption under Section 10(10AA)(i) |
| Qualifying retirement payment to another employee | Limited exemption under Section 10(10AA)(ii) |
| Leave salary paid to legal heirs after an employee's death | The department's guidance treats this as exempt; keep the payment circumstances distinct from salary paid to the employee before death |
The statutory wording of Section 10(10AA) names Central and State Government employees. It does not extend that category to all statutory corporations or government-related undertakings. The broader employer list in the nearby commuted-pension provision is a different rule.
The Income Tax Department's salary guidance discusses retirement, resignation and death payments. Verify that the particular separation and payment qualify; an in-service cash-out is not converted into a retirement exemption merely by its payroll label.
The four limits for other employees
Use the lowest of:
- Actual qualifying leave encashment received.
- Ten times the average eligible monthly salary for the ten months immediately before retirement.
- Cash equivalent of eligible unused earned leave, valued using that average salary.
- The available notified ceiling, after accounting for earlier exemptions.
Eligible salary uses basic pay, qualifying DA and turnover-based commission; it is not total CTC. The department's salary guide gives the salary components and four-limit calculation. The payment above the exemption is taxable salary.
Reconstruct the leave balance
The statutory ceiling limits earned-leave entitlement to 30 days per year of actual service with that employer. It does not allow leave already used to be counted again. Reconcile credited leave, leave taken and previous cash-outs before valuing the eligible balance. A simple minimum of the final HR balance and 30 × years can overstate the exemption where the employer grants more than 30 days annually.
Our illustration uses ten complete years, 45 days credited annually, 200 days taken, no earlier cash-outs, and no other leave adjustments:
| Step | Days |
|---|---|
| HR entitlement: 45 × 10 | 450 |
| HR balance after 200 days taken | 250 |
| Entitlement for this tax calculation: 30 × 10 | 300 |
| Eligible unused balance after the same 200 days taken | 100 |
Assume eligible average monthly salary of ₹60,000, actual payment of ₹5,00,000, and no earlier exemption. Valuing the 100 eligible days at ₹60,000/30 gives ₹2,00,000. The four amounts are ₹5,00,000, ₹6,00,000, ₹2,00,000 and ₹25,00,000. Exemption: ₹2,00,000; taxable portion: ₹3,00,000. This arithmetic illustrates the entitlement limit; have payroll reconcile a real ledger with lapses, changing entitlements or previous encashments.
Earlier exemptions reduce the ceiling
CBDT's announcement of Notification 31/2023 confirms ₹25 lakh from 1 April 2023, replacing ₹3 lakh. It also addresses payments from multiple employers in one year and exemptions allowed in earlier years.
For example, ₹3 lakh exempted in 2018 leaves a ₹22 lakh ceiling for a later qualifying payment under the ₹25 lakh limit. The other three limits still apply. A worked example assuming a ₹15 lakh non-government exemption in 2020 would be inconsistent with the then-applicable ₹3 lakh ceiling.
Check the settlement before estimating tax
Request the employment category, separation date, leave ledger, ten-month salary calculation and exemption history. Reconcile gross payment, exemption and taxable balance with Form 16 and the relevant return fields. Keep evidence for any difference; this guide does not assume that a note can be attached to an income-tax return or that payroll errors occur at any particular rate.
For an ordinary salary-tax estimate, include the taxable portion once within annual salary income; do not also enter it as bonus or other income. Do not put the exemption into 80C or HRA. The calculator excludes surcharge, special-rate income and a separate leave-eligibility assessment. The gratuity calculator concerns a different benefit and cannot establish leave-encashment exemption.
Use the Form 16 reconciliation guide for the related filing records. Obtain case-specific help where the employment status, death-payment circumstances or historical leave record is disputed.
FAQ
The follow-up questions people usually ask after the main recommendation is already clear.
Does a PSU employee automatically get the full government exemption?
No. Section 10(10AA)(i) specifies Central or State Government employees. Do not infer that status from government ownership, a public-sector employer or a statutory corporation; verify the actual employment category.
Is the whole ₹25 lakh always exempt?
No. Other limits can be lower: the payment itself, ten months of eligible average salary, or the cash value of eligible unused earned leave. Earlier exemptions also reduce the available ceiling.
Is leave encashment during continuing service exempt?
The Income Tax Department treats in-service encashment as fully taxable. An annual cash-out while continuing employment is different from a qualifying retirement or separation payment.
Can the salary calculator work out the leave exemption?
No. It has no leave ledger, employer-category or Section 10(10AA) input. Establish the exempt and taxable portions separately before estimating ordinary salary tax.