Leave encashment: does the ₹25 lakh limit apply to old years?

The letter (F.No.200/1/2026-ITA-I) is addressed to the department’s senior officers. According to the letter:

• Taxpayers have quoted Tribunal decisions allowing the higher limit for earlier years: Govardhan Deepchand Bhambhani (ITAT Ahmedabad, 28 July 2025), Govind Chhatwani (ITAT Jaipur, 31 October 2023) and Neelam Gupta (ITAT Delhi, 21 April 2025).
• Many of these rely on Ram Charan Gupta (ITAT Jaipur, 27 June 2023). The letter says that case did not discuss that the notification took effect from 1 April 2023, and it was decided before the Kerala High Court rulings.
• The Kerala High Court disposed of eleven writ petitions between October 2023 and June 2024, treating a retrospective revision as a policy decision. ITAT Ahmedabad followed this in Madan Lal Grover v. ITO (10 April 2026).
• The notification applies only from 1 April 2023 and not to earlier assessment years. Officers are to inform the department’s counsel, and condonation applications for the higher limit in earlier years, by revised return or rectification, are to be dealt with accordingly.

Central and State Government employees are covered by section 10(10AA)(i). Other employees fall under section 10(10AA)(ii), which covers payment for earned leave at credit on retirement, whether by superannuation or otherwise. Leave encashment received while you continue to work is taxed as salary.

The exempt amount is the least of four figures:

1. The leave encashment actually received.
2. Ten months’ average salary, based on the ten months before retirement. “Salary” means basic pay, dearness allowance if the terms of employment so provide, and commission fixed as a percentage of turnover. Other allowances and perquisites are left out.
3. The cash equivalent of leave at credit, counting no more than 30 days for each year of actual service.
4. The notified limit, which depends on the date:

Retired (and paid)	Notified limit
1 April 1998 to 31 March 2023	₹3 lakh (Notification No. 123/2002), unless the 2023 limit is held to reach earlier years (see below)
On or after 1 April 2023	₹25 lakh (Notification No. 31/2023)

The ₹25 lakh is a cumulative ceiling. It is reduced by exemption already allowed under this clause in earlier years. It is shared across employers if you receive payments from more than one in the same year.

Same facts, two dates. Assume average monthly salary of ₹1,00,000, 30 years of service, 400 days of leave at credit and ₹13,33,333 paid.

	Retired and paid 31 March 2023	Retired and paid 1 April 2023
Actual amount received	₹13,33,333	₹13,33,333
Ten months’ average salary	₹10,00,000	₹10,00,000
Cash equivalent of leave (400 days, within the 900-day cap)	₹13,33,333	₹13,33,333
Notified limit	₹3,00,000	₹25,00,000
Exempt (least)	₹3,00,000	₹10,00,000
Taxable as salary	₹10,33,333	₹3,33,333

The notified limit matters only when it is the lowest of the four. Ten months of a ₹2.5 lakh salary is ₹25 lakh, so the ₹25 lakh ceiling limits your exemption only if your average monthly salary is above ₹2.5 lakh.

The question is whether the ₹25 lakh limit can be used for leave encashment received before 1 April 2023.

The taxpayer’s side. The notification’s explanatory memorandum certifies that no person is adversely affected by giving it retrospective effect. Several Tribunal decisions, including those named in the CBDT letter, have allowed the higher limit for earlier years.

The department’s side. The notification states its own start date of 1 April 2023. In Ramesan P.A. v. Union of India (W.P.(C) No. 28983 of 2021, 29 January 2024), the Kerala High Court said it could not direct the Government to revise the limit with retrospective effect for those who retired before 1 April 2023. It called this a policy decision for the Executive. In Madan Lal Grover v. ITO (AY 2020-21), the Tribunal rejected the claim and treated that Kerala ruling as binding on it.

The Kerala petitions asked the Court to direct the Government to issue a retrospective revision. They did not decide how an Assessing Officer should apply the notification in an assessment. Benches have therefore reached different results. Check whether a High Court or the Supreme Court has since ruled on the point.

• Retired and paid on or after 1 April 2023: The ₹25 lakh limit applies, subject to the other three figures. Check that your Form 16 and return reflect the correct exemption.
• Retired and paid before 1 April 2023: The department’s position is the ₹3 lakh limit. Where the excess was taxed, some taxpayers have pursued revised returns, rectification or appeals, with mixed results. Time limits apply to each route, and condonation of delay is discretionary. Compare the tax at stake with the cost of pursuing it.
• Retirement and payment on different sides of 1 April 2023: Take advice. The notification speaks of employees “who retire”, while the letter speaks of assessment years.

Keep your retirement letter, leave encashment computation, Form 16, return, intimation or order, and proof of tax paid.

• Treating ₹25 lakh as a limit for each employer. It is cumulative.
• Looking only at ₹25 lakh and ignoring ten months’ salary and the leave cap.
• Counting allowances such as HRA in “salary” for the ten-month average.
• Treating a Tribunal order in someone else’s case as certain to apply to yours, whether it is favourable or not.