Salary means last drawn salary and includes basic salary + Dearness Allowance (if terms of employment so provide) + Commission based on a fixed % of turnover. Here, Average Salary is to be calculated on the basis of average salary drawn during the period of 10 months immediately preceding the retirement or superannuation.Other relevant points for Leave Salary encashment Exemption ‘Average Salary’ for the aforesaid purpose is to be calculated on the basis of average salary drawn during the period of 10 months ending on the date of retirement. It also includes commission based upon fixed percentage of turnover achieved by an employee, (if any). Salary, for this purpose, means basic salary and includes dearness Allowance if terms of employment so provide.
Step (c) – Find out earned leave actually taken or enchased (in number of days) during the service time, the computation shall be made as follows:. If, however, earned leave is credited at the rate of 23 days leave for each year of service, for step (b) calculation shall be made at the rate of 23 days leave for each year of service. Step (b) – Find out rate of earned leave entitlement from the service rules – how many days leave is credited at the rendered for each year of services (earned leave entitlement can not exceed 30 days for every year of actual services rendered for the employer from whose services he has retired).įor instance, if earned leave is credited at the rate of 45 days leave for each year of service, for step (b) calculation shall be made at the rate of 30 days leave for each year of service. Step (a) – Find out duration of services in number of years (ignore any fraction of year).
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How to find out leave standing to the credit of an employee at the time of retirement or leaving the job The amount of leave encashment actually received at the time of retirement. 10 months’ ‘average salary’ (See Note- 2)ĭ. Cash equivalent of the leave salary in respect of the period of earned leave standing to the credit of employee at the time to retirement/superannuation (earned leave entitlements cannot exceed 30 days for every year of actual service rendered for the employer from whose service he has retired) (See Note- 1)ī. employee on his/ her retirement whereof the complicated part of calculation of exempted leave salary comes into picture which can be calculated as LEAST of the following:Ī. Second being accumulated leaves enchased by a non govt. during the continuation of employment whereof it is fully chargeable to tax. In Simple words from the above tabloid summary we can conclude that Leave Salary is chargeable to tax only in two cases first accumulated leave being enchased by any class of employee- Govt. It is fully or partially exempt from tax in some cases under section 10(10AA)(ii) It is fully exempt from tax under section 10(10AA)(i) Leave encashment at the time of retirement / leaving job However relief can be taken under section 89 Leave encashment during Continuity of employment The taxation of Leave salary for various categories of employees is shown here under: Leave Salary encashment Exemption Calculation
Encashment of leave by surrendering leave standing to one’s credit is known as leave salary. The employee can avail the accumulated leave during his service tenure or it can be encashed at the time of retirement or leaving the job. If leave standing to the employee’s credit is not taken within a year, as per the service rules, it may lapse or it may be encashed or it may be accumulated. This can be accumulated and either taken in the subsequent months or encashed as per the rules extant in force. This 2.5 days is granted with a view to provide him rest to enable him to recover from the stress and strain endured by him during the course of his work. For example in government sector, the earned leave is 2.5 days for every month worked. Earned leave means the leave accrued to the employee in proportion of the work done by him.