₹19 lakh leave encashment, ₹3 lakh tax limit: Why this retired employee went to court

A retired Oil and Natural Gas Corporation (ONGC) employee has won a tax dispute after the Income Tax Appellate Tribunal (ITAT), Chennai, allowed him to claim exemption on his entire ₹19.06 lakh leave encashment amount received at retirement, according to a report by The Economic Times. 

Balasubramanian Venkatachalaperumal retired from ONGC in the financial year 2019-20 and received ₹19.05 lakh as leave encashment. While filing his income tax return (ITR) on October 29, 2021, he declared a total income of ₹31.62 lakh after claiming tax exemption on the full leave encashment amount under Section 10(10AA)(ii) of the Income-tax Act.

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Income Tax Department restricted the exemption to ₹3 lakh

The Income Tax Department later objected. While processing his return, the Centralised Processing Centre (CPC) in Bengaluru allowed an exemption only up to ₹3 lakh and added the remaining amount to his taxable income.

After this adjustment, his total income was recalculated at ₹47.68 lakh.

Venkatachalaperumal challenged the order before the Commissioner of Income Tax (Appeals) on November 26, 2021.

The employee argued that PSU workers should get a higher exemption

Venkatachalaperumal argued that public sector undertaking (PSU) employees should get the same benefit as government employees for leave encashment exemption.

He said that since there was no further notification changing the rule, the ₹3 lakh limit fixed in 2002 should be revised to match the ₹25 lakh exemption available to government employees.

CIT (Appeals) rejected the claim

The CIT (Appeals), however, rejected his argument and said that Venkatachalaperumal, being a PSU employee, could not be treated as an employee of the central or state government.

The authority ruled that he was eligible for exemption under Section 10(10AA)(ii) read with Notification No. 123/2002 dated May 31, 2002, but could not claim exemption under Section 10(10AA)(i).

He then approached the ITAT Chennai.

ITAT Chennai allows full ₹19.06 lakh exemption

On May 4, 2026, ITAT Chennai ruled in his favour and allowed the enhanced tax exemption limit for leave encashment received on retirement under Section 10(10AA)(ii).

The tribunal observed that increasing the exemption limit from ₹3 lakh to ₹25 lakh through Notification No. 31/2013 was a major revision after nearly two decades.

It said the move aimed to reduce the gap between government and non-government employees.

What CA Suresh Surana said about the ruling

Chartered Accountant Suresh Surana told ET Wealth Online that the ITAT Chennai allowed exemption on the entire ₹19.06 lakh leave encashment received by Venkatachalaperumal at retirement under Section 10(10AA)(ii) of the Income-tax Act, 1961.

Surana said the tribunal accepted the taxpayer’s argument and noted that the increase in the exemption limit was not a new benefit but an update of an existing provision to reflect changing economic conditions.

"The enhancement of the exemption limit from ₹3 lakh to ₹25 lakh was not a new exemption but merely a rationalisation and updating of an existing benefit to reflect current economic realities," Surana said.

Meant to remove disparity

The ITAT Chennai observed that the amendment increasing the leave encashment exemption was "remedial and beneficial in nature" and aimed at creating parity between government and non-government employees.

The tribunal held that beneficial provisions introduced to remove hardship should be interpreted liberally and, where appropriate, applied retrospectively, especially when no vested right of the Income Tax Department is affected.

According to Surana, the ITAT also noted that denying the higher exemption to employees who retired before the notification date would create an unfair distinction between similar taxpayers and defeat the purpose of the amendment.

The tribunal also relied on earlier decisions where the enhanced exemption limit was extended to previous assessment years, considering the amendment to be corrective and beneficial.

The ITAT finally directed the Assessing Officer to allow Venkatachalaperumal’s claim for full exemption of ₹19.06 lakh leave encashment.