Government employees get full income tax exemption on leave encashment and this has no upper limit, however non-government employees (private sector, public companies, etc) get only Rs 3 lakh (now increased to Rs 25 lakh from 2023) tax exemption. But are State Bank of India employees government employees or non-government employees? As per Income Tax law, SBI employees are non-government employees, so they can claim up to Rs 3 lakh (now increased to Rs 25 lakh tax exemption from 2023) for leave encashment.
However, Mr Gupta from Mangalam Aanadna Jaipur, a retired SBI employee, did not know this distinction, and so when he got Rs 9.29 lakh leave encashment at the time of his retirement on August 14, 2020, he did not pay any tax. Back when Gupta retired the leave encashment tax exemption was still Rs 3 lakh (on May 24, 2023 via Notification No. S.O. 2276(E), it was enhanced to Rs 25 lakh), so technically Gupta should have paid tax on Rs 6.23 lakh amount (9.29-3).
However, Gupta did no such thing and instead filed his ITR declaring a total income of Rs 6.76 lakh (pension and other sources) and claimed an income tax exemption of Rs 9.29 lakh under Section 10(10AA) in respect of the cash equivalent of leave salary received on retirement.
While processing his Income Tax Return (ITR), the Income Tax Assessing Officer (AO) adjusted his ITR and restricted the leave encashment tax exmemption claim to Rs 3 lakh and added Rs 6.29 lakh to his income and put his total income as Rs 13.05 lakh.
The CIT(A) upheld this adjustment, relying on the judgment of the Hon'ble Delhi High Court in Kamal Kumar Kalia v. Union of India [2020] 268 Taxman 398 (Delhi).
Feeling aggrieved, Gupta hired Chartered Accountant Mukesh Goyal and filed an appeal before the Income Tax Appellate Tribunal (ITAT) Jaipur.
On September 22, 2026 Gupta won the case in ITAT Jaipur as the tax tribunal applied the Rs 25 lakh tax exemption on leave encashment retrospectively for Gupta and gave him full tax relief.
Why did the retired SBI employee get Rs 25 lakh leave encashment tax exemption?
Chartered Accountant Suresh Surana says that the Jaipur Bench of the Income Tax Appellate Tribunal (ITAT), has allowed a retired State Bank of India employee the benefit of the enhanced INR 25 lakh ceiling for leave encashment exemption, even though the case related to AY 2020-21, i.e., a period prior to the enhancement of the statutory ceiling in 2023.
Surana says that ITAT Jaipur did not treat an SBI employee as equivalent to a Central or State Government employee. The ITAT Jaipur emphasised that employees of public-sector undertakings and nationalised banks cannot claim the unlimited tax exemption for leave encashment available to Government employees.
Therefore, Gupta continued to fall under section 10(10AA)(ii) applicable to non-government employees where the tax exemption for leave encashment is Rs 25 lakh at present but when Gupta retired it was Rs 3 lakh.
So Gupta got granted relief by ITAT Jaipur after the tax tribunal considered the fact that the Rs 3 lakh limit was enhanced in 2023 after about 21 years of the old Rs 3 lakh limit, despite successive revisions in the pay of Central Government employees.
Since the enhancement was remedial in nature, ITAT Jaipur held that denying its benefit to an employee who had retired shortly before the enhanced limit was notified would perpetuate the very disparity that the revision was intended to remove.
Accordingly, since Gupta's actual leave encashment of Rs 9.29 lakh was below the revised Rs 25 lakh ceiling, and no other statutory limitation under Section 10(10AA)(ii) had been applied against him, the ITAT Jaipur tax tribunal directed the Assessing Officer to allow tax exemption for the entire Rs 9.29 lakh leave encashment and delete the addition of Rs 6.29 lakh.
ITAT Jaipur discussion
Kuldip Singh, Judicial Member and Prakash, Accountant Member of ITAT Jaipur SMC bench heard this case.
Public sector undertakings and nationalised banks cannot be at par with government employees
The ITAT Jaipur tax tribunal observed that the classification drawn by clause (10AA) of section 10 between Government employees and others has been upheld by the Hon'ble Delhi High Court in Kamal Kumar Kalia (supra), which held that employees of public sector undertakings and nationalised banks cannot claim to be at par with Government employees.
Higher Rs 25 lakh leave enchasment applied for this case
The ITAT Jaipur tax tribunal observed that the higher Rs 25 lakh leave encashment comes into force from April 1, 2023 pursuant to the notification issued on May 24, 2023.
ITAT Jaipur said that the revision of 2023 was thus not the grant of a fresh exemption but the belated discharge of obligation, since the tax exemption limit having remained at Rs 3 lakh since 2002 even though the salary was revised through successive revisions.
ITAT Jaipur said: “A notification of that character is remedial, and to withhold its benefit from an employee who retired shortly before it was issued would perpetuate the very disparity it was meant to remove.”
ITAT Jaipur said that this is the view consistently taken by the Coordinate Benches in the case of retired bank employees, in Dashrath Kumar Sen v. ACIT [2025] 172 taxmann.com 772 (Jaipur - Trib.), which concerned the very assessment year before them (AY 2020-21), and Govind Chhatwani v. CIT (Appeals) [2026] 187 taxmann.com 389 (Jaipur - Trib.),
Moreover, ITAT Jaipur in an identical case (Chhaju Lal Gupta (ITA No. 75/JPR/2026, order dated 31.08.2026), already gave the higher tax exemption for leave encashment to the employee. This case has not been yet overturned by any higher court.
Thus ITAT Jaipur said that they hold the exemption under sub-clause (ii) of clause (10AA) of section 10 cannot, in the case of the assessee, be confined to Rs 3 lakh.
ITAT Jaipur said: “The amount of Rs 9,29,033 received by him is well within the limit of Rs 25,00,000, and no other limit prescribed by the sub-clause has been applied against him.”
ITAT Jaipur ruled that the AO is directed to allow the exemption of Rs 9,29,033 under section 10(10AA) and to delete the addition of Rs 6,29,033.