The Pune Bench of the Income Tax Appellate Tribunal (ITAT) has delivered an important ruling on the applicability of the enhanced leave encashment exemption limit under Section 10(10AA). In the case reported as [2025] 180 taxmann.com 123 (Pune – Trib.), the Tribunal held that a retired PSU employee is entitled to claim exemption up to ₹25 lakh, in line with the revised notification issued by the Central Government.
This decision provides much-needed clarity for thousands of non-government employees—particularly those from Public Sector Undertakings (PSUs)—who retired after the enhancement of the exemption limit, but whose claims were partially disallowed by the Assessing Officers.
Background of the Case
The assessee, a retired employee of a Public Sector Undertaking, received a substantial amount towards leave encashment at the time of retirement. Pursuant to the Finance Act, 2023, the Government increased the exemption limit for non-government employees under Section 10(10AA) from the earlier cap of ₹3 lakh to ₹25 lakh, through a notification issued in 2023.
Relying on this enhanced limit, the assessee claimed exemption of the leave encashment amount up to ₹25 lakh while filing the return of income.
However, during scrutiny, the Assessing Officer (AO) allowed exemption only up to the old limit, contending that the enhanced exemption was either prospective or not applicable to the assessee’s case. The AO treated the balance amount as taxable salary income.
Issue Before the Tribunal
Whether a retired PSU employee is entitled to avail the enhanced exemption limit of ₹25 lakh for leave encashment under Section 10(10AA) after the notification issued by the Central Government?
Tribunal’s Observations and Analysis
The ITAT undertook a detailed examination of the legislative intent, the amendment introduced by the Finance Act, 2023, and the CBDT notification that gave effect to the revised exemption limit.
Enhanced Limit Intended to Benefit Non-Government Employees
The Tribunal noted that the enhanced exemption limit was specifically introduced to bring relief to non-government employees, considering the rise in salary structures and inflation. PSU employees fall squarely within the category of non-government employees eligible for Section 10(10AA) benefits.
Notification Specifies the Ceiling of ₹25 Lakh
The CBDT notification clearly prescribes ₹25,00,000 as the maximum exemption for leave encashment for employees other than those of the Central and State Governments. The Tribunal held that once the notification is effective, the updated limit becomes the operative law for assessment proceedings.
Retirement After Notification Makes Exemption Applicable
The Tribunal emphasized that the assessee retired after the notification came into force, which makes the enhanced limit fully applicable. Consequently, the AO erred in restricting the claim to the old ceiling.
Legislative Intent Must Prevail
The ITAT highlighted that tax exemptions should be interpreted in a manner that aligns with the objective of the amendment. Since the intention of the legislature was to substantially increase the exemption limit, denying the assessee the benefit would defeat the purpose of the reform.
Decision
The Tribunal held that:
- The assessee, being a retired PSU employee, is eligible for exemption up to ₹25 lakh on leave encashment under Section 10(10AA).
- The AO is directed to allow the exemption as claimed.
- The disallowance made on the basis of the old exemption limit is incorrect.
The appeal of the assessee was allowed in full.
Significance of the Ruling
This decision reinforces the applicability of the enhanced leave encashment exemption to non-government employees retiring after the 2023 notification. It also provides clarity on the treatment of PSU retirees, who often fall in a grey area between public and private sector interpretations.
- For retired employees receiving large amounts of accumulated leave encashment, this ruling offers considerable tax relief and certainty in assessment.