When Mrs Moongia from Adresh Nagar retired from LIC on June 30, 2020, she got Rs 9.04 lakh as leave encashment, along with other retiral benefits. However, while filing her income tax return (ITR), Mrs Moongia claimed full income tax exemption on the full leave encashment amount of Rs 9.04 lakh. Mrs Moongia was not aware that LIC employees are non-government employees and in 2020, she could have claimed only Rs 3 lakh tax exemption on leave encashment.
(FYI: In Budget 2023, the tax exemption on leave encashment was increased to Rs 25 lakh for non-government employees)
Thus the Income Tax Department restricted her tax exemption to Rs 3 lakh and sought to tax the remaining Rs 6.04 lakh. That was the reason she got an income tax notice. But her previous tax consultant did not mention anything about this tax notice to her and so after a delay of about 1,277 days, she filed an appeal in the Income Tax Appellate Tribunal (ITAT) Jaipur by hiring a new CA.
The ITAT Jaipur condoned the 1277 days’ delay and said that it is a settled principle of law that a mistake or negligence on the part of a tax consultant engaged by an individual cannot be attributed to him/her and he/she should not be made to suffer for the tax consultant’s mistake.
On September 28, 2026 Mrs Moongia won the case in the ITAT Jaipur.
How to claim tax exemption for leave encashment in ITR and how much can private sector employees claim?
Chartered Accountant Suresh Surana said to ET Wealth Online that leave encashment is a common retirement benefit under which employees receive a cash payment for earned leave accumulated during their period of service. The tax treatment of such payments depends on whether the employee is a government or non-government employee.
While leave encashment received by the central or state government employees at the time of retirement is fully exempted from taxation, private-sector and other non-government employees can claim exemption only up to the limits prescribed under the income-tax law. For a private-sector employee, the amount of income exemption is restricted to the lowest of the following amounts:
- Actual leave encashment received
- Cash equivalent of earned leave standing to the employee’s credit at the time of retirement, with the earned leave entitlement restricted to a maximum of 30 days for each year of actual service
- 10 months’ average salary, based on the average monthly salary for the 10 months immediately preceding retirement
- Rs 25 lakh, being the monetary ceiling prescribed by the central government in 2023.
For instance, if an employee receives a leave encashment of Rs 30 lakh, the tax exemption calculated under the other prescribed parameters works out to Rs 20 lakh, the tax exemption would be restricted to Rs 20 lakh and the balance Rs 10 lakh would be taxable.
Further, the Rs 25 lakh ceiling applies on an aggregate basis. Therefore, where an employee has claimed leave encashment exemption from a previous employer, the amount of exemption already claimed would reduce the ceiling available subsequently.
Further, for claiming the exemption in the income-tax return (ITR), the employee should report the leave encashment as part of the salary income in the Schedule Salary of the applicable ITR and separately disclose the eligible exempt portion under the prescribed field for exempt allowances.
Surana says that any amount received over and above the eligible exemption is taxable under the head “salaries” in the year of receipt and is taxed at the normal slab rates applicable to the employee. There is no separate or special tax rate applicable to the excess leave encashment.
Also read: Leave encashment tax rules for AY 2026-27: How much exemption salaried employees can claim
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ITAT Jaipur discussion
ITAT Jaipur said that the ITAT Agra, in the case of Vijay Kumar Jain vs. ITO in ITA No. 175/Agr/2022 dated 18.06.2025 decided this same issue and thus ITAT Jaipur followed it and gave Mrs Moongia relief.
ITAT Jaipur said that Mrs Moongia’s Rs 9.04 lakh leave encashment which she got after putting in more than 30 years in Life Insurance Corporation of India is exempted u/s 10(10AA) of the Income Tax Act.
ITAT Jaipur said: “CIT(A) has erred in confirming the disallowance made by the AO/CPC, hence the AO is directed to allow the claim of the assessee (Mrs Moongia).”