ITAT Chennai Grants Full Leave Encashment Tax Exemption to PSU Employee

When Mr Balasubramanian Venkatachalaperumal from Jagadamal Street retired from ONGC in FY 2019-20, he got Rs 19.05 lakh as leave encashment and thus he filed his income tax return (ITR) on October 29, 2021. In his ITR he declared a total income of Rs 31.62 lakh after claiming tax exemption for the entire amount of leave encashment under Section 10(10AA)(ii).

When Balasubramanian Venkatachalaperumal retired from Oil and Natural Gas Corporation (ONGC) in FY20, he received Rs 19.05 lakh as leave encashment. Accordingly, he filed his income tax return (ITR) on October 29, 2021, declaring a total income of Rs 31.62 lakh after claiming tax exemption on the entire leave encashment amount under Section 10(10AA)(ii).

But he soon received a notice from the income tax department. While processing his ITR, the department's centralised cell in Bengaluru restricted his leave encashment exemption at Rs 3 lakh and added the remaining amount to his taxable income, calculating his total income at Rs 47.68 lakh.

Aggrieved by the order of the CPC, Bengaluru, Venkatachalaperumal filed an appeal before the Commissioner of Appeals (CIT(A)) on November 26, 2021. Venkatachalaperumal argued that in the absence of further notification issued by the central government having regard to the wordings of Notification No.123/2022 (F.No.200/23/98-ITA-I) PSU employees are entitled to parity with the central government employees in respect of benefits of tax exemption on leave encashment under Section 10(10AA).

Accordingly, he argued that the maximum tax exemption of Rs 3 lakh, which was fixed in 2002, should be increased or adjusted to align with the Rs 25 lakh tax exemption received by government employees.

The CIT (A) said that Venkatachalaperumal, being an employee of a public sector undertaking (PSU), cannot be considered an employee of the central and state governments. Accordingly, in respect of encashment of earned leave on superannuation, the CIT (A) ruled that Venkatachalaperumal is entitled to claim exemption under Section 10(10AA)(ii) read with Notification No. 123/2002 dated May 31, 2002, and cannot claim exemption u/s. 10(10AA) (i).

Feeling disappointed, he filed an appeal with the Income Tax Appellate Tribunal (ITAT) Chennai. On May 4, 2026, Venkatachalaperumal won the case as ITAT Chennai granted him enhanced tax exemption limit under Section 10(10AA)(ii) for leave encashment received on retirement.

The ITAT Chennai said that raising the tax exemption limit on leave encashment from Rs 3 lakh to Rs 25 lakh, as per Notification No. 31/2013, is a significant upward revision after nearly two decades and aims to make the benefits for non-government employees more alike those for government employees, thereby removing an evident disparity.

Chartered Accountant Suresh Surana told the ET Wealth Online that in this case, the ITAT Chennai ruled in favour of Venkatachalaperumal and allowed exemption of the entire leave encashment amount of Rs 19.06 lakh received on retirement under Section 10(10AA)(ii) of the Income-tax Act, 1961.

Surana said that the ITAT Chennai accepted the taxpayer's contention and observed that the enhancement of the exemption limit from Rs 3 lakh to Rs 25 lakh was not a new exemption but merely a rationalisation and updation of an existing benefit to reflect current economic realities.

The ITAT Chennai also observed that the amendment which enhanced the leave encashment tax exemption was remedial and beneficial in nature and intended to ensure parity between government and non-government employees.

Accordingly, the ITAT Chennai held that beneficial provisions intended to remove hardship should be interpreted liberally and, where appropriate, applied retrospectively, particularly when no vested right of the income tax department is adversely affected.

According to Surana, the ITAT Chennai also observed that denying the enhanced exemption to employees who retired prior to the notification date would create an artificial and inequitable distinction between similarly placed taxpayers, thereby defeating the very objective of the amendment.

The ITAT also relied on several coordinate bench decisions wherein the enhanced exemption limit had been extended to earlier assessment years on the ground that the amendment was curative and beneficial in nature.

Accordingly, the Tribunal held that the taxpayer (Venkatachalaperumal) was entitled to exemption of the entire leave encashment amount of Rs 19.06 lakh and directed the Assessing Officer to allow the claim.