₹25 lakh is a ceiling, not an automatic deduction
For tax year 2026-27, a non-government employee’s qualifying retirement leave encashment is deductible under section 19(1), Table serial number 14, of the Income-tax Act, 2025. The deduction is restricted by the actual payment, qualifying earned-leave value, ten months’ average salary and the notified ceiling. Section 19(2)(f) additionally limits aggregate claims after accounting for amounts exempted or deducted in earlier years. A payment below ₹25 lakh can therefore still be partly taxable.
Use the provision applicable to the income period
The 2025 Act as amended by Finance Act 2026 commenced on 1 April 2026. For FY 2025-26/AY 2026-27, the corresponding legacy provision is section 10(10AA) of the 1961 Act. Do not apply a current tax-year label merely because an older return is filed in 2026. This article addresses ordinary employee receipts at qualifying retirement and was checked on 22 October 2026.
Notification 31/2023, explained in the Ministry of Finance release of 25 May 2023, increased the non-government ceiling to ₹25 lakh from 1 April 2023 and explained the aggregate and earlier-claim restrictions. Section 536(2)(j) of the 2025 Act continues earlier notifications so far as consistent with the corresponding provision. Read that continuity alongside section 19, rather than assuming the ceiling was reset on 1 April 2026. The current Act expressly refers to earlier amounts allowed as either exemptions or deductions.
Reconstruct earned leave before valuing it
Start with actual earned leave at retirement. The statutory entitlement cannot exceed thirty days for each year of actual service. A generous employer policy does not by itself enlarge the income-tax deduction. Reconcile leave earned, leave taken, previous encashments and closing entitlement; do not use the service-years cap as though every capped day remains unavailed.
For a working in which eligible leave is expressed in days on a thirty-day monthly basis, qualifying leave value equals eligible days divided by thirty, multiplied by the relevant average monthly salary. Separately calculate ten times the average monthly salary for the ten months immediately preceding retirement. The employment and salary-component records must support that average; a final-month pay figure, cost-to-company total or employer’s payment formula is not automatically the statutory base. The examples assume basic-salary-only employment and a correctly established average, avoiding disputes about special allowances or commissions.
Apply the four tests and the remaining aggregate ceiling
For each employer, identify the minimum of the actual qualifying payment, eligible leave value and ten-month salary cap, together with the notified limit. Then apply the remaining aggregate ceiling to all qualifying claims for the taxpayer. Where more than one employer pays in the same tax year, both cannot independently use an unreduced ₹25 lakh limit. Prior claims reduce the ceiling by the amount actually allowed, not by the entire historical cash receipt if only part was exempt.
Keep a statement of previous employers and earlier returns. Evidence matters particularly where a person changed jobs and claimed retirement-related relief earlier, or where older years used the former ₹3 lakh ceiling. The change of legislation does not create a fresh personal allowance. An earlier receipt’s inclusion year and qualifying deduction must be checked from the records; do not resolve a missing history by assuming zero.
Separate employee classification and other salary deductions
Table serial number 13 gives different treatment to an employee of the Central Government or a State Government for the stated retirement leave payment. Employment by a government-owned company, bank or other institution must not be treated as government employment merely because of ownership. Establish the legal employer before selecting the row. Ordinary encashment during continuing service is not brought within the retirement row just by describing it as accumulated leave.
The section 202 regime restrictions do not remove the stated serial number 14 retirement deduction; the professional-tax restriction in section 202(2)(a)(iv) concerns Table serial number 1. Still prepare the complete salary computation separately. The examples show only the balance of the leave payment after its own deduction, before any independently available standard deduction, other income, tax slabs, rebate, surcharge or cess. They do not calculate final tax or promise a refund.
Errors to resolve before the return
Do not deduct both a legacy exemption and a current section 19 deduction for the same amount. Do not deduct the employer’s entire CTC or take a thirty-days-per-year allowance without subtracting leave already used. Treat retirement, resignation, death-related payments and disputed earlier-year claims according to their actual legal facts; this working does not establish that every cessation or every legal-heir payment has identical treatment.
Worked illustrations
These illustrations use fictional facts and expressly stated assumptions. Amounts are Indian rupees unless a different currency or unit is specified. They are independent examples, not findings about any actual client.
Illustrative example 1: the leave-value limit controls
Actual retirement payment is ₹12,00,000, the established average monthly salary ₹1,00,000 and qualifying unavailed earned leave 240 days. Leave value is 240 ÷ 30 × ₹1,00,000 = ₹8,00,000; ten-month salary is ₹10,00,000. With no earlier claim, deduction is min(₹12,00,000, ₹8,00,000, ₹10,00,000, ₹25,00,000) = ₹8,00,000. Balance of the payment is ₹4,00,000.
Illustrative example 2: ten months is a separate cap
Actual payment is ₹18,00,000, average salary ₹1,00,000 and qualifying leave 420 days. Assume sufficient actual service and a fully reconciled leave ledger. Leave value is ₹14,00,000, but ten-month salary is ₹10,00,000. With no earlier claim, deduction is ₹10,00,000 and the payment balance is ₹8,00,000.
Illustrative example 3: the notified ceiling controls a high-salary case
Actual payment is ₹32,00,000, average salary ₹3,00,000 and qualifying leave 360 days. Leave value is ₹36,00,000 and ten-month salary ₹30,00,000. No earlier claim exists. The ₹25,00,000 ceiling is lowest, leaving ₹7,00,000 of the payment before other salary provisions.
Illustrative example 4: an earlier exemption reduces today’s allowance
Actual payment is ₹20,00,000, average salary ₹2,50,000 and qualifying leave 300 days. Both leave value and ten-month salary are ₹25,00,000. Earlier allowable claims total ₹9,00,000, so the remaining aggregate ceiling is ₹16,00,000. Deduction is ₹16,00,000 and the payment balance ₹4,00,000. The earlier claim is not ignored merely because it arose under the 1961 Act.
Illustrative example 5: the actual payment is lower than the other tests
Actual payment is ₹6,00,000, average salary ₹1,20,000 and eligible leave 180 days. Leave value is ₹7,20,000 and ten-month salary ₹12,00,000. With no earlier claims, deduction is limited to the actual ₹6,00,000. The payment balance is nil; the difference from the larger leave value is not an additional deduction.
Illustrative example 6: two employers share the remaining ceiling
An employee has ₹4,00,000 of earlier allowed claims, leaving ₹21,00,000. Employer A pays ₹14,00,000 and B pays ₹12,00,000 in the same tax year. Each has an established ₹2,00,000 average salary and 240 qualifying days, so the individual leave-value and ten-month limits do not restrict these payments. Total provisional eligibility is ₹26,00,000, but aggregate deduction is ₹21,00,000. If ₹14,00,000 is allocated to A, only ₹7,00,000 remains for B. Combined payment balance is ₹5,00,000, not nil.
Ten-step verification table
| Step | Verification | Evidence to retain |
|---|---|---|
| 1 | Confirm the income period and applicable Act. | Receipt and salary inclusion working. |
| 2 | Establish the legal employer category. | Appointment and employer records. |
| 3 | Confirm that the payment meets the retirement provision. | Retirement order and settlement description. |
| 4 | Reconcile earned leave and actual service. | Leave ledger and service history. |
| 5 | Apply the thirty-days-per-service-year entitlement cap. | Adjusted eligible-leave calculation. |
| 6 | Establish the ten-month salary average. | Component analysis and monthly payroll. |
| 7 | Compute all four limits independently. | Lower-of schedule. |
| 8 | Obtain earlier exemption and deduction history. | Prior returns and employer declarations. |
| 9 | Apply the aggregate ceiling across employers. | Taxpayer-level allocation and remaining cap. |
| 10 | Reconcile salary reporting and credits. | Final salary computation and supporting certificates. |
Sixteen practitioner FAQs
1. Is every receipt below ₹25 lakh fully deductible?
No. Actual payment, qualifying leave value, ten-month salary and earlier claims can restrict it.
2. Which provision applies from 1 April 2026?
Section 19(1), Table serial number 14, read with section 19(2)(f), for the stated non-government retirement receipt.
3. Is section 10(10AA) irrelevant to older returns?
No. It remains the relevant legacy reference for the earlier income periods governed by the 1961 Act.
4. Does the 2025 Act reset prior exemptions?
No. Section 19(2)(f) explicitly takes earlier amounts allowed as exemptions or deductions into account.
5. Do all employers get a separate ₹25 lakh limit?
No. The taxpayer’s aggregate restriction applies where one or more employers pay in the same tax year.
6. Is the final month’s CTC the salary average?
No. Establish the relevant salary base and ten-month average from its components.
7. Can the service-years cap replace the leave ledger?
No. It limits entitlement; it does not prove how much leave remains after use and encashment.
8. Can an employer’s more generous leave policy increase the deduction?
Not beyond the statutory thirty-days-per-year entitlement constraint and the other limits.
9. Is a PSU employee automatically a government employee?
No. Confirm the legal employment category rather than relying on government ownership.
10. Does ordinary in-service encashment qualify under this retirement row?
No. A continuing-service payment is not made a retirement receipt by its label.
11. Does the new regime automatically deny this retirement deduction?
The stated section 202 restriction does not remove Table serial number 14. Check the complete computation separately.
12. Should earlier claims be reduced by the historical gross receipt?
Use the amount actually allowed as exemption or deduction, supported by prior records.
13. Are all examples calculations of final income-tax?
No. They calculate only the balance of the leave payment after this specific deduction.
14. Can standard deduction be claimed twice against the same salary total?
No. Prepare the complete salary-head computation and apply its independent annual conditions.
15. Does a nil payment balance establish that no return is required?
No. Filing depends on the taxpayer’s complete facts and applicable conditions.
16. Does this article establish retrospective relief for pre-April 2023 retirements?
No. Those periods and any judicial claim require separate examination; no retrospective outcome is assumed here.
Working-paper organisation
Keep the source documents, calculation and final conclusion together for the same entity and period. If using assureTax or other assureOffice tools, use only confirmed available functions and retain this evidence with the output.
Conclusion
Prepare one taxpayer-level schedule supported by the leave ledger and earlier claims. The correct result follows from the minimum of the applicable limits and the remaining aggregate allowance, rather than the size of the retirement cheque alone.