hi all,
if any body could answer this question, will be of gr8 help to me.
thanx
stealth

Hi Stealth,

My apologies for not replying sooner - I was away for almost a month.

But can you please clarify the question - What do you mean when you say "How to calculate leave salary"? Do you mean you want to calculate salary you earn when you are on leave, or you are hinting at tax implication on leave encashment at the time of retirement?

hi Raag,
Example:- Mr x was an employee with ABC Ltd. His basic is 10000 Per month, 20% of basic forms the part of retirement. Date of joining 1/oct/1987 and date of retirement 16/11/2007. Leave encashment received is 120000 for 300 days, leave entitled 40 days per year. How much tax Mr x has to pay?

stealth

Dear Stealth,

Here is the rule for determining the tax liability in case of leave encashment:

For non-Government employees, leave encashment is exempt up to the minimum of the following:

a) Rs. 3,00,000

b) The average of the salary drawn during the last ten months before retirement

c) Cash equivalent of the leave due at the time of retirement (not exceeding 30 days for each year of actual service)

d) Leave encashment actually received at the time of retirement

Here, Salary includes basic salary and dearness allowance, if any.

An amount over and above this (minimum of a, b, c and d) is treated as salary, and is clubbed with that years income.


In our example,

a) Rs. 3,00,000

b) Average salary of last 10 months would be Rs. 10,000 * 10 = Rs. 1,00,000

c) You haven't specified how many leaves Mr. X has outstanding at the time of his retirement. Suppose, he has a leave balance of 120 days.

Then, Cash equivalent of leave due = (Rs. 10,000 / 30) * 120 = Rs. 40,000

d) Leave encashment actually received = Rs. 1,20,000

The minimum of a, b, c and d is Rs. 40,000.

Thus, Rs. 40,000 would be exempt from Income Tax (IT), and the remaining Rs. 80,000 would be clubbed with that years income and taxed according to the applicable slab.


Now, if Mr. A's salary was Rs. 40,000:

a) Rs. 3,00,000

b) Rs. 40,000 * 10 = Rs. 4,00,000

c) (Rs. 40,000 / 30) * 120 = Rs. 1,60,000

d) Rs. 1,20,000

The minimum of a, b, c and d is Rs. 1,20,000.

Thus, the entire Rs. 1,20,000 received would be exempt from Income Tax (IT).





Please not these other things as well:

* Leave encashment money received by Government employees at retirement is fully exempt from income tax (That is, there is no cap of Rs. 3,00,000)

* Leave encashment while the person is still in service is fully taxable (clubbed with that years income)

* Encashment of sick leave is fully taxable (clubbed with that years income)