Rules Regarding Leave Encashment and House Rent Allowance

1. House Rent Allowance: You may claim the least of the following as HRA exemption.

a. Total HRA received from your employer

b. Rent paid less 10% of (Basic salary +DA)

c. 40% of salary (Basic+DA) for non-metros and 50% of salary (Basic+DA) for metros
Read more about how to claim HRA exemption.

Illustration: Mr. Hrehaan is Sports Broadcaster and lives in Mumbai working for
ESPN. His annual salary is 40 Lakh rupees. His Basic Salary is 16 lakh rupees while He
gets 8 Lakh as Dearness Allowance. He gets 80,000 as per month HRA from his
employer. Kindly Calculate the HRA Exemption which could be claimed by Mr. Hrehaan.

2. Leave Encashment: Leave encashment received at the time of retirement /

resignation is fully exempt for Central or State Government employee. Leave encashment
received by non-Government employee is exempt to the extent of lower of the following:

1. Amount notified by the Government- Rs 3 lakh

2. Actual leave encashment amount

3. Average salary of last 10 months

4. Cash equivalent to Earned Leave in credit of Employee at time of retirement

(should not exceed more than 30 days per year)

Illustration: For instance, Gopal resigns from company XYZ. His monthly salary is Rs. 1.5 lakh.
He was entitled to 30 days leave per year. His leave balance at the time of retirement is 20 leaves.
His leave encashment of Rs. 1 lakh.

Hence the exempt leave encashment will be lower of:

1. Amount notified by the Government- Rs 3 lakh

2. Actual leave encashment amount – Rs. 1 lakh

 3. Average salary of last 10 months – Rs. 15 lakh (Rs. 1.5 lakh x 10 months)

4. Salary per day x unutilised leave (considering maximum 30 days leave per year)
for every year of completed service – Rs. 1.5 lakh / 30 days = Rs. 5,000 per day x
20 days = Rs. 1 lakh

Hence, total leave encashment of Rs. 1 lakh would be exempt.

Illustration 2: Mr. Karan retired as Advertisement Officer from PVA Private Limited at
the age of 60 years on 10th December 2021. He worked for the company for 30 years and
9 months. As per services rules he received 25 EL every year. In overall service he
availed 240 Days of Leave. His basic pay was 16,000, D.A 8,000 He received 3,55,000 as
Leave Encashment. Kindly calculate the exemption he can claim.

Solution

1. Amount notified by the Government- Rs 3 lakh

2. Actual leave encashment amount – 3,55,000

3. Average salary of last 10 months – 16,000+8,000 =24,000 x10 = 2,40,000

4. Cash equivalent to Earned Leave in credit of Employee at time of retirement

(should not exceed more than 30 days per year) - 24,000/30= 800 per day x 150 =
300000

25x30= 750

1X25=25

Total = 775 Leaves

Less = 240 Leave Availed

Balance at retirement = 535

Leave Encashment = 4,28,000

Exempted = 2,40,000

Taxable : 1,15,000