Retired before April 2023? ITAT allows LIC employee to claim tax exemption on ₹9.04 lakh leave encashment

A retired Life Insurance Corporation of India (LIC) employee has won relief from the Income Tax Appellate Tribunal (ITAT), Jaipur, in Renu Moongia vs ITO (assessment year 2021-22), after the tax department restricted the exemption on her ₹9.04 lakh leave encashment to ₹3 lakh.

In its order pronounced on 28 September 2026, the tribunal directed the assessing officer to allow exemption on the entire amount, relying on earlier tribunal decisions that applied the enhanced ₹25 lakh exemption limit introduced in 2023.

Moongia retired on 30 June 2020 after serving LIC for more than 30 years. She received ₹9,04,669 as leave encashment along with other retirement benefits and claimed exemption on the entire amount under Section 10(10AA) of the Income Tax Act, 1961.

However, while processing her income tax return for assessment year 2021-22, the Centralised Processing Centre (CPC) allowed only ₹3 lakh as exempt and treated the remaining ₹6,04,669 as taxable. The first appellate authority upheld the restriction, prompting her to approach the tribunal.

Why ITAT allowed the exemption

The dispute arose from a change in the tax treatment of leave encashment. In the Union Budget 2023, the government announced an increase in the exemption limit for non-government salaried employees from ₹3 lakh to ₹25 lakh. The Central Board of Direct Taxes (CBDT) notified the revised ceiling through Notification No. 31/2023 on 24 May 2023, with effect from 1 April 2023.

Moongia, however, had retired in June 2020, before the revised limit was announced. The question was whether she could benefit from the enhanced ceiling despite retiring earlier.

The Jaipur tribunal relied on earlier decisions by coordinate benches that had allowed the enhanced exemption limit to apply in similar cases. It directed the assessing officer to allow exemption on the full ₹9,04,669 received by Moongia.

The tribunal also condoned a delay of 1,277 days in filing her appeal. It accepted her explanation that her earlier tax consultant had failed to inform her about the notice and proceedings, holding that the consultant’s negligence should not automatically be attributed to the taxpayer.

How leave encashment is taxed at retirement

Leave encashment is the amount an employee receives for accumulated earned leave that remains unused. The tax exemption depends on the employee’s category and the applicable statutory limits.

• Central and state government employees: Leave encashment received at retirement is fully exempt from income tax under Section 10(10AA)(i).
• Non-government employees: The exemption is subject to prescribed conditions, including a ceiling of ₹25 lakh under Section 10(10AA)(ii), effective from 1 April 2023.

For non-government employees, the actual exemption is determined using the applicable statutory formula, which considers the amount received, eligible earned leave, average salary and the prescribed ceiling. The ₹25 lakh limit is not an automatic exemption for every employee on the ent

The government has also specified that the aggregate exemption cannot exceed ₹25 lakh where an employee receives qualifying payments from more than one employer in the same financial year. Exemptions already allowed in earlier years must also be taken into account while determining the remaining limit.

Any leave encashment amount that does not qualify for exemption is taxable as salary at the applicable income tax rates.

What retirees should check

Retirees should review the exemption claimed on leave encashment while filing their income tax returns, particularly if the tax department has restricted it to ₹3 lakh despite the enhanced ceiling.

Employees who retired before April 2023 should not assume that the ₹25 lakh limit automatically applies to their cases. The Jaipur ruling relied on earlier tribunal decisions, and the outcome of a similar claim will depend on the facts, applicable law and relevant judicial precedents.

Taxpayers who have received an adjustment or assessment order restricting their exemption may consider consulting a tax professional to examine whether the ruling and other relevant decisions support their claim. They should also check the applicable appeal or rectification deadlines before deciding how to proceed.