The salary is taxable on the basis of “due” or “receipt”, whichever is earlier. Since he retired in February 2024, the entitlement of the leave was due to him from February 2024 onwards. While section 10(10AA) of the Income Tax Act, 1961 provides an exemption for “payment” for entitlement of leave received, one should read the exemption section along with the entitlement section and hence the exemption for an employee who retired would be available in the year in which the entitlement of leave was due to him.
The facts are not clear as to what is meant by penalty on holiday entitlement by the employer. However, if the penalty is merely for calculation and disbursement, the holiday entitlement became due to you on the day you retired and therefore the relief would be available in the tax year 2023-24 itself and not in the tax year 2024-25 when you received the holiday entitlement. In practice, the employer would also have considered such holiday entitlement along with the relief in the tax year 2023-24 itself and it would be reflected in your Form 16 for that year. On the other hand, if contractually the holiday entitlement is due to you in April 2024, then you can include it in the income and claim relief for the tax year 2024-25. In practice, the relief would be available in the year in which your employer considers such amount for tax purposes.
Further, you may also note that the exemption from entitlement of leave at the time of retirement in case of an employee other than a State or Central Government employee would be calculated as the lesser of the following:
a) Effective vacation payment received
b) 10 months of salary (calculated on the basis of the salary received 10 months before retirement)
In addition, vacation pay must not exceed 30 days for each year of service provided by the worker to the employer from which he or she has retired.
Finally, vacation pay during the period of service is always subject to tax and the above-mentioned exemption applies only in the case where vacation pay is made upon the employee’s retirement.
Mahesh Nayak is a Certified Public Accountant at CNK & Associates.
—If you have any questions about personal finance, write to us at [email protected] and our experts will answer you.
Disclaimer:
The information contained in this post is for general information purposes only. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the website or the information, products, services, or related graphics contained on the post for any purpose.
We respect the intellectual property rights of content creators. If you are the owner of any material featured on our website and have concerns about its use, please contact us. We are committed to addressing any copyright issues promptly and will remove any material within 2 days of receiving a request from the rightful owner.