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This article was first published 1 year ago  » Getahead » 'Why is my leave encashment not exempt from tax?'

'Why is my leave encashment not exempt from tax?'

October 07, 2022 09:24 IST
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Illustration: Dominic Xavier/

Anil Rego, CEO, Right Horizons (external link), answers your personal income tax queries.


Suresh Gupta: My wife is working in LIC (Public sector) having pension benefits. So No contribution is added by employer in her PF account. Please tell me 5 lakh PF limit without tax is applicable on it or not. As per my knowledge limit of 5 lakh is applicable where there is no contribution from Employer in PF Account.

Anil Rego: Yes, this enhanced limit of Rs 5 lakh is applicable for your spouse as she is working in a public sector firm.

This exemption mainly benefits government employees as it does not contribute to their PF and instead contributes to the pension fund of employees. 


I have retired normally from a PSU Bank. I have been given exemption of Rs 3 lakh from the leave encashment amount (eight months equivalent salary) on retirement and rest amount has been taxed by bank. As the Government employees are fully exempted, being a PSU bank employee, am I not eligible for the same benefit?

Anil Rego: The PSUs and nationalised banks are not treated as central and state government employees.  Hence for leave encashment, they cannot take the benefit of unlimited exemption.

For a PSU employee (including a PSU Bank), the maximum exemption allowed on leave encashment is Rs 3 lakh in your case.

Prafull Pandey: I am a central government employee. My wife owns a house which was purchased in November 1998 at an approx. cost of Rs 7.4 lakh. She is selling it now in April 2022 at a price of Rs 68 lakh. My wife is a homemaker with no income. Please guide on:

1. How much time can this amount be kept deposited in savings bank account without incurring tax?

Anil Rego: When you are unable to reinvest the capital gain incurred from sale of property, before filing the income tax return and, if the time of reinvestment in a specified avenues to save tax has not expired, it is required that you deposit such unutilised capital gain into capital gain account scheme.

You can open this account in any authorised bank branch excluding rural branches of those banks.

There can be 2 types of deposits. The interest earned in the capital gains account is subject to tax and TDS will be deducted. Any amount either underutilised beyond 60 days of withdrawal or beyond specified time limit will be offered to tax.

2. How the LTCG can be calculated on this transaction?

Anil Rego: This is calculated using Cost Inflation Index (CII). In cases where the property is bought before 2001, the IT laws allow you to adopt the fair market value as of 1st April 2001.  It may be noted that this fair market value cannot be higher than the circle rate/guidance value as of this date.

The CII of 2001-02 is taken as base value of 100 and this value for current FY is 331.

The Indexed Cost of Acquisition will thus be = 331/100*(FMV as of 1st April, 2001). 

If you have spent for any maintenance etc., you can add to this and claim.

The capital gain tax will be 20% of the Sale value minus Indexed Cost of Acquisition.

Surcharge and Cess will be as applicable on the above tax computation.

3. How to invest this money and in what type of instruments so that tax can be saved?

Anil Rego: You can save tax on the capital gains by investing into different avenues:

a. Purchase or construct another house. New house is purchased one year before or two years after the sale of the old house or new house is constructed within 3 years after the sale of the old house. This new house can’t be sold within 3 years of possession. The cost of new property should be less than the earlier sale amount.

b. You can invest in 54EC bonds to a maximum limit of Rs 50 lakh. You must invest in notified bond within 6 months of sale.

You can find more of Mr Rego's answers here.

Note: The questions and answers in this advisory are published to help the individual asking the question as well the large number of readers who read the same.

While we value our readers' requests for privacy and avoid using their actual names along with the question whenever a request is made, we regret that no question will be answered personally on e-mail.

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