Can retirees appeal for enhanced ₹25L leave encashment exemption for pre-2023 years? ITAT ruling explained
Retirees who could claim just ₹3 lakh as leave encashment tax exemption before 2023 may now have an opportunity to seek relief. The Income Tax Appellate Tribunal (ITAT), Chennai, said in a recent order that the enhanced ₹25 lakh exemption limit introduced on May 24, 2023 can be applied retrospectively.
In an order dated June 12, 2026, the ITAT noted that both PSU (public-sector undertaking) and private-sector retired employees can benefit from the enhanced leave encashment exemption limit, including those who had already paid tax on leave encashment exceeding ₹3 lakh.
The higher limit of leave encashment tax exemption applies to the period of earned leave in the credit of the employee at the time of retirement whether on superannuation or otherwise, the Central Board of Direct Taxes (CBDT) said in its notification at that time.
What led to the ITAT’s ruling on leave encashment?
The ITAT’s ruling was given in the case of Vattikundala Prabhakara Rao, a retired ONGC employee, who received ₹19.05 lakh as leave encashment on superannuation during FY 2019-20,
While filing his income tax return (ITR) for AY 2020-21, Rao claimed the entire amount as exempt under Section 10(10AA)(ii) of the Income-tax Act, 1061. However, the Centralised Processing Centre, Bengaluru, restricted the exemption to ₹3 lakh and taxed the remaining amount.
Subsequently, he filed an appeal for his tax exemption claim, which was dismissed by the Commissioner of Income Tax Appeals. They held that “exemption to the extent of ₹3,00,000 is only available to the assessee unless the said limit is raised by Central Government by any notification which has not been done so far.”
The assessee’s appeal before the ITAT was delayed by 1,023 days. However, the Tribunal condoned the delay, observing that the assessee had been “honestly and obediently waiting for any final order from any court” after the Delhi High Court issued notice to the government in the Kamal Kumar Kalia case on November 8, 2019, challenging the ₹3 lakh exemption cap.
According to an Upstox report, the Revenue’s counsel argued that the enhanced exemption limit applied only from April 1, 2023, and therefore could not benefit the assessee for AY 2020-21. The assessee’s counsel, however, argued that the notification was “beneficial and curative” in nature.
The counsel also pointed to the explanatory memorandum, which stated that no person would be adversely affected by the change.
ITAT rules in assessee’s favour
Ruling in the Rao’s favour, the ITAT observed that the increase in the exemption limit from ₹3 lakh to ₹25 lakh was a “significant upward revision” after nearly two decades and that the change was intended to bring the benefit available to non-government employees in line with that available to government employees and remove the disparity between the two.
The ITAT further said, “It is a settled principle that provisions which are beneficial in nature and intended to remove hardship are to be construed liberally and, in appropriate cases, applied retrospectively, particularly where no vested right of the Revenue is adversely affected”.
The Tribunal also noted that the explanatory memorandum to the notification stated: “It is hereby certified that no person is being adversely affected by giving retrospective effect to this notification”.
The ITAT found “considerable force” in the assessee’s contention that denying the enhanced exemption to employees who retired before the notification date would create “an unjust and artificial distinction between similarly placed employees retiring before and after the date of notification, which would defeat the very purpose of the amendment”.
