Relief for retirees: ITAT backs enhanced leave encashment exemption on retirement for pre-2023 years

A PSU or a private sector employee is eligible for enhanced ₹25 lakh leave encashment tax exemption on retirement retrospectively, if it has been denied previously, according to a recent order of the Income Tax Appellate Tribunal (ITAT), Chennai.

In an order dated June 12, 2026, the ITAT was of the view that CBDT Notification No. 31/2023 on May 24, 2023, which raised the leave encashment exemption limit under Section 10(10AA)(ii) of the Income Tax Act from ₹3 lakh to ₹25 lakh for non-government employees, can be applied retrospectively.

The ITAT's order came in the case of Vattikundala Prabhakara Rao, a retired employee of ONGC. Rao had received ₹19,05,997 as leave encashment upon superannuation during FY 2019-20. In the ITR for AY 2020-21, he claimed the entire amount as exempt under Section 10(10AA)(ii). However, the Centralised Processing Centre, Bengaluru, restricted the exemption to ₹3,00,000, bringing the balance to tax.

The Commissioner of Income Tax Appeals dismissed his appeal, holding that "exemption to the extent of ₹3,00,000 is only available to the assessee unless the said limit is raised by Central Government by any notification which has not been done so far."

The assessee's appeal to the ITAT was delayed by 1,023 days. The Tribunal, however, condoned the delay, noting that the assessee had been "honestly and obediently waiting for any final order from any court" after the Delhi High Court issued notice to the government in the Kamal Kumar Kalia case on November 8, 2019, questioning the ₹3 lakh cap . The Tribunal cited the Supreme Court's decision in Collector, Land Acquisition v. Mst. Katiji, which held that "substantial justice should prevail over technical considerations".

The Revenue's counsel argued that the notification enhancing the limit was effective only from April 1, 2023, and could not apply to assessment year 2020-21. But the assessee's counsel countered that the notification was "beneficial and curative in nature" and that its explanatory memorandum "expressly clarifies that no person is adversely affected".

Ruling in favour of the assessee, the ITAT observed that the enhancement from ₹3 lakh to ₹25 lakh was "a significant upward revision after nearly two decades and is clearly aimed at aligning the benefit available to non-government employees with that available to government employees, thereby removing an evident disparity".

The ITAT further said, "It is a settled principle that provisions which are beneficial in nature and intended to remove hardship are to be construed liberally and, in appropriate cases, applied retrospectively, particularly where no vested right of the Revenue is adversely affected".

The Tribunal also noted that the explanatory memorandum to the notification stated: "It is hereby certified that no person is being adversely affected by giving retrospective effect to this notification".

The ITAT found "considerable force" in the assessee's contention that denying the enhanced exemption to employees who retired before the notification date would create "an unjust and artificial distinction between similarly placed employees retiring before and after the date of notification, which would defeat the very purpose of the amendment".

What the ruling means

The ruling means that non-government retirees who were taxed on leave encashment above ₹3 lakh for assessment years before 2023-24 may file a revision or appeal claiming the enhanced exemption. However, they should first consult a legal or tax expert first for the right guidance.