624. Relief in case of encashment of leave salary by an employee while in service - Whether admissible
Circular No. 431 was issued by the Central Board of Direct Taxes on 12 September 1985. Its subject is 624. Relief in case of encashment of leave salary by an employee while in service - Whether admissible.
Holds that relief under section 89(1) read with rule 21A is admissible on leave salary encashed by an employee while still in service. Section 89(1) gives relief where salary is paid in arrears or in advance, or where an assessee receives salary for more than twelve months in one financial year, or receives a payment that is a profit in lieu of salary under section 17(3), and his income is therefore assessed at a higher rate than it otherwise would be; the relief is granted by the Income-tax Officer on an application. The Board notes that encashment of leave salary on retirement, whether on superannuation or otherwise, is already exempt under clause (10AA) of section 10, inserted by the Finance Act, 1982 with effect from 1 April 1978.
The Board considered the question whether relief under section 89(1) was admissible on amounts received on encashment of leave salary while in service.
624. Relief in case of encashment of leave salary by an employee while in service - Whether admissible
1. Section 89(1) provides for relief to an assessee when salary, etc., is paid in arrears or in advance or if he receives in one financial year salary for more than 12 months or a payment which under the provisions of clause (3) of section 17 is a profit in lieu of salary and therefore, his income is assessed at a rate higher than at which it would have otherwise been assessed. This relief is granted by the Income-tax Officer on an application made to him in this behalf.
2. The question of admissibility of relief under section 89(1) in respect of amounts received on encashment of leave salary while in service was considered by the Board. The Board are advised that relief under section 89(1) read with rule 21A of the Income-tax Rules would be admissible in respect of encashment of leave salary by an employee when in service. The encashment of leave salary on retirement whether on superannuation or otherwise has already been exempted, by insertion of clause (10AA) in section 10, by the Finance Act, 1982 with effect from 1-4-1978.
Circular : No. 431 [F. No. 174/43/82-IT (A-II)], dated 12-9-1985.
When an employee's claim for relief under section 89(1) on in-service leave encashment is rejected, or when the employer is asked to give effect to it in deduction from salary.
Rules it names. Rule 21A of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.
Source: the Income Tax Department’s own published text — its page for this instrument.
