Section 10(10AA)

Section 10(10AA) — the law in short

What the courts have decided on section 10(10AA), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Kamal Kumar Kalia v Union of India High CourtHelps department
  I retired from a nationalised bank. Am I a government employee for the full leave encashment exemption under s.10(10AA)?
  No. The Delhi High Court rejected that challenge. Employees of public sector undertakings and nationalised banks do not become Central or State Government employees merely because their employer is treated as 'State' under Article 12 of the Constitution, so their leave encashment is exempt only under the capped second limb of s.10(10AA)(ii). On the separate grievance that the notified ceiling had not been revised since 1998 the Court expressed only a prima facie view and issued notice; that part of the petition was still pending in 2026.
• CIT v D.P. Malhotra High CourtHelps taxpayer
  My client resigned; he did not superannuate. The officer says s.10(10AA) is only for retirement, so his leave encashment is fully taxable. Is that right?
  No. Resignation is a mode of retirement, and s.10(10AA) applies to leave encashment received on resignation just as it does on superannuation. The clause says 'at the time of his retirement whether on superannuation or otherwise', and the Bombay High Court held that how the retirement came about is immaterial.
• K. Gopalakrishnan v Central Board of Direct Taxes High CourtHelps departmentNo later treatment found
  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?
  No. The Explanation to s.10(10) fixes 'salary' for both s.10(10) and s.10(10AA) as the meaning in clause (h) of rule 2 of Part A of the Fourth Schedule — basic pay plus dearness allowance if the terms of employment so provide, and nothing else. The Madras High Court held there is no ambiguity in that definition and it must be applied; it also upheld the differential treatment of government and non-government employees in both clauses against Article 14.
• Ramamoorthy Sundar v ITO ITATHelps taxpayerNo later treatment found
  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?
  Not necessarily. The Tribunal condoned a delay of the order of five hundred days and then allowed the enhanced exemption of Rs 25,00,000 under s.10(10AA), treating the subsequent development on the judicial front and the CBDT notification as themselves part of the sufficient cause for the delay.
• Awadhesh Kumar Dixit v DCIT ITATHelps taxpayerNo later treatment found
  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?
  This Tribunal said yes. It held that the enhanced ceiling of Rs 25,00,000 notified under s.10(10AA)(ii) is a remedial and beneficial measure and directed the Assessing Officer to allow exemption up to Rs 25,00,000 or the actual amount received, whichever is lower, even though the assessee had retired on 30 April 2018, nearly five years before the notification.
• Pudhureddiyur Raju Kalaimani v ITO ITATHelps taxpayerNo later treatment found
  CPC denied my leave encashment exemption under s.10(10AA) because Form 26AS shows the gross salary, and the Department says I resigned and joined another employer in the same year. Can I still get it?
  Yes on both points. Leave encashment received on resignation is exempt under s.10(10AA), and nothing in the statute disentitles an employee who takes up fresh employment in the same year; what matters is that the receipt was on cessation of employment. A Form 26AS mismatch thrown up in s.143(1) processing is not a sustainable ground to tax the amount where the claim is supported by the employer's Form 16.
• Kailash Narayan Shridhar v DCIT ITATHelps taxpayer
  The processing centre cut down my exemption claim in the intimation without ever telling me it proposed to. Is the intimation valid?
  No. The Ahmedabad Tribunal held the intimation invalid and quashed it. The first proviso to section 143(1)(a) permits no adjustment unless intimation of the proposed adjustment is first given to the assessee and any response is considered. That requirement is not merely procedural: it goes to the root of the validity of the proceedings. Here the processing centre restricted the leave encashment exemption from Rs 17,71,010 to Rs 3,00,000 without any prior notice, which was admitted. Following coordinate bench decisions and in the absence of any contrary decision of the jurisdictional High Court, the Tribunal held the intimation bad and did not go into the merits of the exemption.
• Statutory position — s.10(10A): commuted pension, why a corporation established by an Act is on the government side of the line, and the one-third / one-half rule that turns on gratuity CBDT Circulars & InstructionsCuts both ways
  My client has commuted part of his pension from a private employer's scheme and received a lump sum. How much of it is exempt, and does it make any difference that he also drew gratuity?
  It makes all the difference. Under s.10(10A)(ii) a payment in commutation of pension received under any scheme of any other employer is exempt only to the extent of the commuted value of one-third of the pension he is normally entitled to receive where he receives any gratuity, and the commuted value of one-half of such pension in any other case. Under s.10(10A)(i) the commuted pension is exempt without any limit at all for the classes listed there — which include not only Central and State Government servants and the all-India and defence services but also employees of a local authority and of a corporation established by a Central, State or Provincial Act — and under s.10(10A)(iii) any payment in commutation of pension received from a fund under clause (23AAB) is exempt without limit.
• CBDT Circular No. 3/2025 - salary TDS for FY 2024-25 CBDT Circulars & InstructionsCuts both ways
  Is there one document that tells the payroll department how to deduct on salary for the year?
  Yes. The Board issues an annual circular under s.192 and this is the one for financial year 2024-25. It consolidates the rates, the amendments made by the Finance Acts of 2023 and 2024, and the mechanics of the employer's deduction, and states that where no amendment has been made the position in the earlier circular for financial year 2022-23 continues.
• 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 CBDT Circulars & InstructionsCuts both ways
  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.
• Statutory position — s.10(10): the three limbs of the gratuity exemption, the twenty-lakh ceiling set by S.O. 1213(E), and why the ceiling is an aggregate across employers and across years CBDT Circulars & InstructionsCuts both ways
  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?
  The Assessing Officer is right on both points. Section 10(10) has three separate limbs and only the third carries a Central Government ceiling; that ceiling is twenty lakh rupees, specified by CBDT notification S.O. 1213(E) dated 8 March 2019 in relation to employees who retire, become incapacitated prior to retirement or die on or after 29 March 2018, or whose employment is terminated on or after that date. The first proviso to the clause caps the aggregate exemption where gratuities are received from more than one employer in the same previous year, and the second proviso reduces the ceiling by whatever was left out of total income under the clause in any earlier previous year — so the twenty lakhs is a once-in-a-lifetime cumulative allowance, not a per-employer or per-year one.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.