Retired employee denied tax exemption on Rs 13 lakh leave encashment, ITAT Jaipur restores tax benefit under new Rs 25 lakh limit

Nov 12, 2025

Synopsis
A retired State Bank of India employee from Jaipur won a tax case. The Income Tax Appellate Tribunal ruled in his favor, increasing his leave encashment exemption to Rs 25 lakh. This decision overturns previous orders from the income tax department and CIT(A). The tribunal applied a new CBDT notification retrospectively. The Assessing Officer will now implement the revised limit.

Retired employee denied tax exemption for Rs 13 lakh leave encashment; files case and wins in ITAT Jaipur due to retrospective application of higher tax exemption for leave encashmentET OnlineRetired employee denied tax exemption for Rs 13 lakh leave encashment; files case and wins in ITAT Jaipur (AI generated representative image)

Mr. Vashistha, a retired employee of the State Bank of India from Jaipur, had to file a case in the Income Tax Appellate Tribunal (ITAT) after the income tax department denied him a higher tax exemption of Rs 25 lakh for leave encashment. What happened here was Mr. Vashistha got Rs 13 lakh as part of his retirement benefits (leave encashment) and he claimed tax exemption for the entire amount. For the uninititated, at present up to Rs 25 lakh is tax exempt for leave encashment, but earlier it was Rs 3 lakh.

On November 3, 2021, the income tax department issued him a Section 143(1) notice denying the higher tax exemption of Rs 25 lakh for leave encashment. Although he challenged this tax notice in CIT (A), he ended up losing the case there.

The ITAT Jaipur noted that the only submission put forth by Vashistha’s authorised representative was that he received Rs 13 lakh (13,05,810) as leave encashment benefit under Section 10(10)AA of the Income Tax Act, 1961.

Vashistha’s authorised representative, chartered accountant Sunil Porwal, pointed out that by a notification dated May 24, 2023, from the Central Board of Direct Tax (CBDT) increased the leave encashment limit for non government employees to Rs 25 lakh, and that change was made with retrospective effect.

Thus, Mr. Porwal argued that the CIT(A) has made a mistake by not applying the notification dated May 24, 2023 with retrospective effect. He argued that the appeal should be granted.

In the course of the argument, the income tax department’s representative did not dispute the issuance of notification no. 31/2023/F.No.200/2023- ITA-I dated May 24, 2023 which confirmed and that leave encashment limit was indeed raised to Rs 25 lakh.

ITAT Jaipur concluded that considering the notification dated May 24, 2023, which serves as an evidence of beneficial instructions for non government employees, both the assessment order and CIT(A) order should be overturned.

ITAT Jaipur judgement: “As a result, this appeal is allowed. Assessing Officer to give effect to revised limit of leave encashment. Based on these observations the appeal of the assessee is allowed. Order pronounced in the open Court on 07/10/2025.”

Chartered Accountant Suresh Surana says that in the given case (No.1139/JPR/2025), the assesee retired from the State Bank of India and received Rs 13 lakh (13,05,810) as leave encashment upon superannuation/retirement. The assessment for AY 2021–22 was completed under section 143(1), where the Assessing Officer denied full exemption under section 10(10AA) and taxed the amount exceeding Rs 3 lakh which was the earlier limit applicable to non-government employees.

The assessee’s appeal before the CIT(A) was dismissed on October 18, 2022. Thereafter, he filed an appeal before the ITAT Jaipur Bench after a delay of 959 days, citing advanced age and genuine confusion in seeking professional advice. The Tribunal first condoned the delay, accepting his sworn affidavit that the delay was bona fide and not deliberate.

Issue Before the Tribunal

According to Surana, the issue before ITAT was whether the assessee was entitled to claim enhanced exemption of Rs. 25 lakh on leave encashment under section 10(10AA), pursuant to CBDT Notification No. 31/2023 [F.No.200/3/2023-ITA-I], dated 24 May 2023, and whether the same applied retrospectively to earlier assessment years, including AY 2021–22.

Tribunal’s Findings and Rationale

Surana explains:

The Tribunal noted that the CBDT notification dated 24 May 2023 had revised the exemption limit from Rs 3 lakh to Rs 25 lakh for non-government employees with retrospective effect.

The Departmental Representative (DR) did not dispute either the existence of the notification or its retrospective application.

The Tribunal observed that this notification constituted a beneficial and clarificatory instruction, intended to provide relief to retiring employees in line with the higher limits applicable to government staff.

Accordingly, both the assessment order and the CIT(A) order were held to be inconsistent with the revised legal position, and were set aside.

The ITAT directed the Assessing Officer to apply the revised Rs 25 lakh exemption limit and recompute taxable income.

Surana says: "The employee won the case because the CBDT’s notification increasing the exemption limit for leave encashment was beneficial and expressly made retrospective. Therefore, the assessee’s higher exemption claim was valid, and the Tribunal held that the enhanced limit must apply even to past assessments like AY 2021–22."

What did the leave encashment tax law say for AY 2021-22?

Surana says that during the relevant assessment year (A.Y. 2021–22), the law governing tax exemption on leave encashment at the time of retirement was contained in section 10(10AA)(ii) of the Income-tax Act, 1961 (hereinafter referred to as ‘the IT Act’). Under this provision, while the entire amount of leave encashment received by a Central or State Government employee was fully exempt from tax, the exemption for non-government employees was restricted to Rs 3,00,000, as notified by the Central Government vide Notification No. S.O. 588(E), dated May 31, 2002.

How much tax exemption do employees get for leave encashment at present?

Surana says that currently, the tax exemption available to employees in respect of leave encashment at the time of retirement continues to be governed by section 10(10AA) of the IT Act as follows:

In the case of a Central or State Government employee, the entire amount of leave encashment received at the time of retirement, whether on superannuation or otherwise, is fully exempt from income tax.

There has been no monetary ceiling or upper limit prescribed for Government employees under clause (i) of section 10(10AA).

Surana says: "Thus, while non-government employees are now entitled (post CBDT Notification No. 31/2023, dated 24 May 2023) to an enhanced exemption up to Rs. 25,00,000, Government employees continue to enjoy 100% exemption on the entire amount of leave encashment received upon retirement."

[The Economic Times]