Recently, one of my friends, after being with the same company for over 15 years left his job. He had not retired neither had he accepted any VRS.

He simply resigned as he had been offered a better position in another firm. As he had been serving for a long time, his termination benefits were quite substantial. One of the components of such proceeds was the leave salary standing to his credit. The problem arose when the company wanted to deduct tax on the full amount of leave salary despite there being a specific section in the Income Tax Act which provides exemption up to specified limits.

I understand that this is the general practice as the exemption is available only for those employees who are retiring and not for those who resign.

Technical resignation - Others - Labour & Service Law

This article examines the veracity of this policy. But first a little background. The employee can avail the accumulated leave during his service tenure or it can be encashed at the time of retirement or leaving the job.

LEAVE ENCASHMENT | CENTRAL GOVERNMENT EMPLOYEES NEWS

Now, if any leave is encashed during the continuity of employment, it is chargeable to tax, irrespective of the fact whether the employee is in government or private service. On the other hand, in the case of any leave encashment at the time of termination of service, the tax treatment differs.

This treatment is also further substantiated by a judgement CTR CIT vs D P Malhotra dated July 28, The claim of the assessee was rejected by the income tax officer as he was of the opinion that the benefit of Section 10 10AA is available only in cases where the amount is received by the assessee at the time of retirement which, according to him, did not include resignation.

In the context of employment, it means conclusion of a career.

Once an employee resigns, his service stands terminated from the date on which his letter of resignation is accepted by the appropriate authority, unless there is any law or statutory rule governing the conditions of service to the contrary. In other words, on acceptance of resignation, the employee stands retired from service.

On the other hand, it is clear from the language of Section 10AA itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise. The same view is supported by the decision of the Madras High Court in the case CIT vs R J Shahney 54 CTR Mad In that encashment of earned leave on technical resignation also the assessee had resigned and retired from employment.

The high court had held: It may be on superannuation or voluntary. If there is any voluntary retirement from service, we are satisfied that the provisions of S 10 10AA would apply. The writer is director, Wonderland Consultants, a tax and financial planning firm.

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