My client is a private-sector retiree who was paid leave encashment. The Assessing Officer has restricted the exemption to three lakhs. What is the current limit, what instrument set it, and how is the exempt amount actually computed?
The current limit for a non-government employee is Rs. 25,00,000, specified by Notification No. 31/2023, S.O. 2276(E), which is deemed to have come into force with effect from 1 April 2023, in relation to employees mentioned in s.10(10AA)(ii) who retire, whether on superannuation or otherwise. The exempt amount is the least of four figures — the amount actually received; the cash equivalent of the earned leave at credit, the entitlement to earned leave being capped by the Explanation at thirty days for every year of actual service rendered to the employer from whose service he has retired; ten months' average salary computed on the average salary drawn during the ten months immediately preceding retirement; and the notified limit — and the notified limit is an aggregate across employers in the same year and across earlier years.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text) on 2023-04-01, reported as Section 10(10AA) of the Income-tax Act, 1961, as amended up to 2025; Notification No. 31/2023/F. No. 200/3/2023-ITA-I, S.O. 2276(E). It bears on section 10(10AA), section 10(10AA)(i), section 10(10AA)(ii), section 10(10) of the Income Tax Act 1961, in Salary & Perquisites and Capital Gains Exemptions matters.
This is the figure a reader will copy straight into a computation, so both halves of it matter — the number and the date. The number moved from Rs. 3,00,000 to Rs. 25,00,000, and the notification does it not by a plain prospective commencement but by the words "shall be deemed to have come into force with effect from the 1st day of April, 2023", which is why the retrospectivity question for earlier retirees has been litigated; this library already holds the Tribunal decisions on that, including Awadhesh Kumar Dixit v DCIT. What is often missed is everything around the number. First, the limb split: an employee of the Central Government or a State Government is inside sub-clause (i) and his leave encashment on retirement is exempt without any ceiling, while everyone else is inside sub-clause (ii) and subject to all four limbs — and who counts as a Government employee for this purpose is itself the question the Delhi High Court decided in Kamal Kumar Kalia v Union of India, already in this library. Second, the thirty-day cap in the Explanation is a cap on ENTITLEMENT, computed per year of actual service with the employer from whose service he has retired; an employer's more generous leave rules do not enlarge the exemption. Third, the ten-month test is a ten-month AVERAGE of salary drawn in the ten months immediately preceding retirement, not the last month annualised. Fourth, "salary" for this clause is fixed by the Explanation to s.10(10) as the meaning in clause (h) of rule 2 of Part A of the Fourth Schedule, which is what the Madras High Court decided in K. Gopalakrishnan v Central Board of Direct Taxes. Fifth, both provisos are aggregation provisions and work exactly as those to s.10(10) do — one limit across employers in the same previous year, reduced in later years by whatever was already left out of total income under the sub-clause.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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As the clause now stands, clause (10AA) reads: (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ; (ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government. A first proviso caps the aggregate exemption where such payments are received from more than one employer in the same previous year; a second proviso reduces the limit by amounts not included in total income under the sub-clause in earlier previous years. The Explanation provides that for the purposes of sub-clause (ii) the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired. The notification specifying the limit, as reproduced in the order of the ITAT Chennai in Ramamoorthy Sundar v ITO, reads: "S.O. 2276(E).-In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs.25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise. 2. This notification shall be deemed to have come into force with effect from the 1st day of April, 2023. [Notification No. 31/2023/F. No. 200/3/2023-ITA-I]".
Leave encashment received on retirement by an employee of the Central Government or a State Government is exempt under s.10(10AA)(i) without any ceiling. For any other employee, s.10(10AA)(ii) exempts the least of the amount received, the cash equivalent of earned leave at credit computed on an entitlement not exceeding thirty days for every year of actual service with the employer from whose service he has retired, ten months' average salary computed on the ten months immediately preceding retirement, and the limit specified by the Central Government, which is Rs. 25,00,000 by Notification No. 31/2023, S.O. 2276(E), deemed to have come into force with effect from 1 April 2023. That limit is an aggregate: it is capped across employers in the same previous year and reduced in later years by amounts already excluded under the sub-clause.
Not applicable — this is a statement of statutory text and of a notification. No judicial reasoning is involved. The decisions on who is a Government employee for sub-clause (i), on the meaning of "salary", and on the position of employees who retired before 1 April 2023 are separate entries in this library.
the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;
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Handle my notice → Ask a CA on WhatsAppThe current limit for a non-government employee is Rs. 25,00,000, specified by Notification No. 31/2023, S.O. 2276(E), which is deemed to have come into force with effect from 1 April 2023, in relation to employees mentioned in s.10(10AA)(ii) who retire, whether on superannuation or otherwise. The exempt amount is the least of four figures — the amount actually received; the cash equivalent of the earned leave at credit, the entitlement to earned leave being capped by the Explanation at thirty days for every year of actual service rendered to the employer from whose service he has retired; ten months' average salary computed on the average salary drawn during the ten months immediately preceding retirement; and the notified limit — and the notified limit is an aggregate across employers in the same year and across earlier years. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 10(10AA), section 10(10AA)(i), section 10(10AA)(ii), section 10(10) of the Income Tax Act 1961. It is reported as Section 10(10AA) of the Income-tax Act, 1961, as amended up to 2025; Notification No. 31/2023/F. No. 200/3/2023-ITA-I, S.O. 2276(E). This is the figure a reader will copy straight into a computation, so both halves of it matter — the number and the date. The number moved from Rs. 3,00,000 to Rs. 25,00,000, and the notification does it not by a plain prospective commencement but by the words "shall be deemed to have come into force with effect from the 1st day of April, 2023", which is why the retrospectivity question for earlier retirees has been litigated; this library already holds the Tribunal decisions on that, including Awadhesh Kumar Dixit v DCIT. What is often missed is everything around the number. First, the limb split: an employee of the Central Government or a State Government is inside sub-clause (i) and his leave encashment on retirement is exempt without any ceiling, while everyone else is inside sub-clause (ii) and subject to all four limbs — and who counts as a Government employee for this purpose is itself the question the Delhi High Court decided in Kamal Kumar Kalia v Union of India, already in this library. Second, the thirty-day cap in the Explanation is a cap on ENTITLEMENT, computed per year of actual service with the employer from whose service he has retired; an employer's more generous leave rules do not enlarge the exemption. Third, the ten-month test is a ten-month AVERAGE of salary drawn in the ten months immediately preceding retirement, not the last month annualised. Fourth, "salary" for this clause is fixed by the Explanation to s.10(10) as the meaning in clause (h) of rule 2 of Part A of the Fourth Schedule, which is what the Madras High Court decided in K. Gopalakrishnan v Central Board of Direct Taxes. Fifth, both provisos are aggregation provisions and work exactly as those to s.10(10) do — one limit across employers in the same previous year, reduced in later years by whatever was already left out of total income under the sub-clause. If it applies to you, the first step is this: Place the client in sub-clause (i) or (ii) first. Central Government and State Government employees are in (i) and there is no ceiling; a public sector undertaking or a nationalised bank is not the Government for this purpose on the reasoning in Kamal Kumar Kalia.
As the clause now stands, clause (10AA) reads: (i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise ; (ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government. A first proviso caps the aggregate exemption where such payments are received from more than one employer in the same previous year; a second proviso reduces the limit by amounts not included in total income under the sub-clause in earlier previous years. The Explanation provides that for the purposes of sub-clause (ii) the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired. The notification specifying the limit, as reproduced in the order of the ITAT Chennai in Ramamoorthy Sundar v ITO, reads: "S.O. 2276(E).-In exercise of the powers conferred by sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to the maximum amount receivable by its employees as cash equivalent of leave salary in respect of the period of earned leave at their credit at the time of their retirement, whether superannuation or otherwise, hereby specifies the amount of Rs.25,00,000 (twenty-five lakhs rupees only) as the limit in relation to employees mentioned in that sub-clause who retire, whether on superannuation or otherwise. 2. This notification shall be deemed to have come into force with effect from the 1st day of April, 2023. [Notification No. 31/2023/F. No. 200/3/2023-ITA-I]". The matter was decided on 2023-04-01 by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Leave encashment received on retirement by an employee of the Central Government or a State Government is exempt under s.10(10AA)(i) without any ceiling. For any other employee, s.10(10AA)(ii) exempts the least of the amount received, the cash equivalent of earned leave at credit computed on an entitlement not exceeding thirty days for every year of actual service with the employer from whose service he has retired, ten months' average salary computed on the ten months immediately preceding retirement, and the limit specified by the Central Government, which is Rs. 25,00,000 by Notification No. 31/2023, S.O. 2276(E), deemed to have come into force with effect from 1 April 2023. That limit is an aggregate: it is capped across employers in the same previous year and reduced in later years by amounts already excluded under the sub-clause.
Not applicable — this is a statement of statutory text and of a notification. No judicial reasoning is involved. The decisions on who is a Government employee for sub-clause (i), on the meaning of "salary", and on the position of employees who retired before 1 April 2023 are separate entries in this library. In the words reproduced by the source cited on this page: "the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired ;"
It was decided by the CBDT Circulars & Instructions on 2023-04-01 and is reported as Section 10(10AA) of the Income-tax Act, 1961, as amended up to 2025; Notification No. 31/2023/F. No. 200/3/2023-ITA-I, S.O. 2276(E). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 10(10AA), section 10(10AA)(i), section 10(10AA)(ii), section 10(10), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Leave encashment received on retirement by an employee of the Central Government or a State Government is exempt under s.10(10AA)(i) without any ceiling. For any other employee, s.10(10AA)(ii) exempts the least of the amount received, the cash equivalent of earned leave at credit computed on an entitlement not exceeding thirty days for every year of actual service with the employer from whose service he has retired, ten months' average salary computed on the ten months immediately preceding retirement, and the limit specified by the Central Government, which is Rs. 25,00,000 by Notification No. 31/2023, S.O. 2276(E), deemed to have come into force with effect from 1 April 2023. That limit is an aggregate: it is capped across employers in the same previous year and reduced in later years by amounts already excluded under the sub-clause. It arises in Salary & Perquisites and Capital Gains Exemptions matters, on section 10(10AA), section 10(10AA)(i), section 10(10AA)(ii), section 10(10) of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a sub-clause (ii) client, compute all four figures and take the least: amount received; cash equivalent of leave at credit after applying the thirty-day-per-year entitlement cap; ten months' average salary on the ten months immediately preceding retirement; and Rs. 25,00,000. Apply the Explanation's thirty-day cap to the ENTITLEMENT, year by year of actual service with the employer from whose service the client retired. Do not take the leave balance the employer's rules produced if the rules allow more than thirty days a year. Take "salary" from clause (h) of rule 2 of Part A of the Fourth Schedule, following K. Gopalakrishnan, and not from the Form 16 gross. Reconstruct earlier leave encashment received from earlier employers and how much was left out of total income under the sub-clause; the second proviso reduces the ceiling by that amount. If the retirement predates 1 April 2023, note that the commencement words are "deemed to have come into force with effect from the 1st day of April, 2023" and read the Tribunal decisions this library already holds before advising; do not simply assert the higher limit.
Still good law. Two published editions seven years apart print clause (10AA) identically, and the Department's current explanatory material, amended on its face up to the Finance Act 2026, still prints Rs. 25,00,000 and the same four-limb computation. That is the best evidence available here that both the clause and the figure hold for tax years up to assessment year 2026-27. Two limits on that. No Finance Act text has been read and no amendment footnote against clause (10AA) could be found, so the clause's legislative history is not established and nothing here dates its sub-clauses. And the notification is quoted from a judicial reproduction rather than from the Gazette, for the reason the editor note gives, so its exact words should be checked before they are quoted in a proceeding. Whether the Rs. 25,00,000 limit reaches employees who retired before 1 April 2023 is contested and is dealt with in the Tribunal entries this library already holds; nothing in this entry decides it, and the notification's own words — 'shall be deemed to have come into force with effect from the 1st day of April, 2023' — are what the argument turns on. Two other questions this entry does not answer and which decide many of these cases: who counts as an employee of the Central Government or a State Government for sub-clause (i), where the exemption has no ceiling at all; and what 'salary' means for the ten-month average. Both are the subject of High Court decisions this library carries separately, and the statutory text alone will not settle either. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
THIS ENTRY DELIBERATELY DOES NOT REPEAT WHAT THE LIBRARY ALREADY HOLDS. There are entries on s.10(10AA) in K. Gopalakrishnan v CBDT (the meaning of 'salary'), CIT v D.P. Malhotra and Pudhureddiyur Raju Kalaimani (encashment on resignation), Kamal Kumar Kalia v Union of India (whether a public sector bank employee is a Government employee), Awadhesh Kumar Dixit v DCIT and Ramamoorthy Sundar v ITO (the Rs. 25,00,000 limit for pre-2023 retirees) and Kailash Narayan Shridhar v DCIT. What was missing was the statutory position itself — the four limbs, the Explanation, the two aggregation provisos and the notification with its commencement words — and that is what this entry supplies. SOURCING. Clause (10AA) was transcribed in full from the current published edition, which prints the Act name 'Income-tax Act, 1961' and the heading 'Incomes not included in total income', and again from the edition as amended up to 2018; the two are identical. THE NOTIFICATION was read as reproduced in the order of the ITAT Chennai in Ramamoorthy Sundar v ITO, which prints the S.O. number, the enabling sub-clause, the figure, the commencement clause and the file number '[Notification No. 31/2023/F. No. 200/3/2023-ITA-I] SOURABH JAIN, Under Secy.'. THAT REPRODUCTION IS A SCAN OF A GAZETTE PAGE AND IS VISIBLY CORRUPT IN PLACES — it prints 'sub-cıause' for 'sub-clause' and 'clause (1044)' for 'clause (10AA)'. Only the passage that came back clean has been quoted, and THE DATE ON WHICH THE NOTIFICATION WAS SIGNED IS NOT STATED, because the reproduction does not show it. What is stated is only what the reproduction shows: S.O. 2276(E), Notification No. 31/2023/F. No. 200/3/2023-ITA-I, issued under sub-clause (ii) of clause (10AA) of section 10, specifying Rs. 25,00,000, deemed to have come into force with effect from 1 April 2023. Anyone who needs the date of signature must go to the Gazette. The figure of Rs. 25,00,000 is independently printed in the Department's current explanatory material on the taxability of retirement benefits, which states on its face that it is amended up to the Finance Act 2026 and which sets out the same four-limb computation and the thirty-day rule. NEITHER EDITION OF THE SECTION CARRIED AN AMENDMENT FOOTNOTE against clause (10AA), so the clause itself is not dated here. 'decided_on' is a labelled placeholder set to the commencement date the notification itself fixes, 1 April 2023; it is not a decision date, and 'bench' and 'favours' are inapplicable to a statutory entry. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Leave encashment received on retirement by an employee of the Central Government or a State Government is exempt under s.10(10AA)(i) without any ceiling. For any other employee, s.10(10AA)(ii) exempts the least of the amount received, the cash equivalent of earned leave at credit computed on an entitlement not exceeding thirty days for every year of actual service with the employer from whose service he has retired, ten months' average salary computed on the ten months immediately preceding retirement, and the limit specified by the Central Government, which is Rs. 25,00,000 by Notification No. 31/2023, S.O. 2276(E), deemed to have come into force with effect from 1 April 2023. That limit is an aggregate: it is capped across employers in the same previous year and reduced in later years by amounts already excluded under the sub-clause.
TaxSphere, “Statutory position — s.10(10AA): the four-limb leave encashment computation, the thirty-days-a-year cap in the Explanation, and the Rs. 25,00,000 limit notified by S.O. 2276(E) from 1 April 2023”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-section-10-10aa-leave-encashment-computation-and-the-twenty-five-lakh-limit/ (validity last checked 2026-09-09)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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My client retired from a nationalised bank in April 2018 and CPC capped his leave encashment exemption at Rs 3,00,000. The Rs 25,00,000 limit came only in May 2023. Can he still get it for AY 2019-20?
My client sat on an NFAC order restricting his leave encashment exemption for over a year, and only came to me after hearing that the limit is now Rs 25,00,000. Is the appeal dead on limitation?
For the s.10(10) gratuity and s.10(10AA) leave encashment limits, can I compute 'salary' on the pay my employer actually used — basic plus all the allowances that went into provident fund pay?
My client retired last year and received gratuity from two employers in the same year. The Assessing Officer says he can only have one twenty-lakh exemption in total, and has also asked about gratuity he received when he changed jobs in 2014. Is that right, and where does the twenty-lakh figure come from?
