Budget 2023: FM Sitharaman offers bumper tax exemption on leave encashment

Union Budget 2023: Finance Minister Nirmala Sitharaman on Wednesday announced a huge exemption on leave encashment on the retirement of non-government salaried employees. During her budget speech, she said the limit of Rs 3 lakh was fixed in 2002 when the highest basic pay in the government was Rs 30,000 pm. "In line with the increase in government salaries, I am proposing to increase this limit to Rs 25 lakh," she said.

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According to the Budget document, encashment of earned leave up to 10 months of average salary, at the time of retirement in case of an employee other than an employee of the central government or state government is exempt under sub-clause (ii) of clause (10AA) of section 10 of the Income-tax Act.
 
"The maximum amount which can be exempted is Rs 3 lakh at present. It is proposed to issue a notification to extend this limit to Rs 25 lakh," the document states.

Besides this, the finance minister also increased the income tax limit in the new tax regime. Currently, those with income up to Rs 5 lakh do not pay any income tax in both old and new tax regimes. Sitharaman proposed to increase the rebate limit to Rs 7 lakh in the new tax regime. "Thus, persons in the new tax regime, with income up to Rs 7 lakh will not have to pay any tax," she said.

In 2020, the finance minister introduced the new personal income tax regime with six income slabs starting from Rs 2.5 lakh. She changed the tax structure in this regime by reducing the number of slabs to five and increasing the tax exemption limit to Rs 3 lakh. 

In the new tax structure, 5 per cent tax will be applicable on income from Rs 3-6 lakh, 10 per cent on Rs 6-9 lakh, 15 per cent on Rs 9-12 lakh, 20 per cent on Rs 12-15 lakh, and 30 per cent above Rs 15 lakh.

This will provide major relief to all taxpayers in the new regime, the finance minister said. An individual with an annual income of Rs 9 lakh will be required to pay only Rs 45,000. This is only 5 per cent of his or her income. It is a reduction of 25 per cent on what he or she is required to pay now, ie, Rs 60,000.

Similarly, an individual with an income of Rs 15 lakh would be required to pay only Rs 1.5 lakh or 10 per cent of his or her income, a reduction of 20 per cent from the existing liability of Rs 1,87,500.