Taxman caps SBI retiree’s leave exemption at Rs 3 lakh; but ITAT grants full relief

The ITAT Jaipur ruled that the retired SBI employee could claim exemption on the entire Rs 9.29 lakh received as leave encashment. The decision matters because SBI employees are treated as non-government employees for this provision, yet the tribunal applied the revised Rs 25 lakh ceiling to a 2020 retirement.

The Assessing Officer had limited the exemption to Rs 3 lakh, the ceiling applicable when the employee retired. It added the remaining Rs 6.29 lakh to his taxable income. The tribunal instead held that the 2023 increase was remedial, not a completely new exemption. It directed the officer to allow exemption under Section 10(10AA).

The tribunal said the payment was well within Rs 25 lakh. It also relied on earlier Jaipur Tribunal decisions involving retired bank employees. The ruling removed the disputed addition and gave the retiree full relief on this payment, although it did not classify SBI employees as government employees.

For non-government employees, the leave-encashment exemption was originally capped at Rs 3 lakh. This ceiling applied when the SBI employee retired in 2020. Any amount above that figure was technically taxable under the rule then being applied.

The limit was revised to Rs 25 lakh in 2023 through Notification No. S.O. 2276(E). The article states that the revised limit took effect from April 1, 2023, following the notification issued on May 24, 2023. Government employees do not face the same stated upper limit.

The change became important in the SBI retiree’s case. He received Rs 9.29 lakh, which exceeded the old Rs 3 lakh ceiling but was comfortably below Rs 25 lakh. ITAT Jaipur treated the higher ceiling as remedial and allowed the entire payment to be exempt, despite the earlier retirement date.

Leave encashment is money paid for accumulated leave when an employee retires. In the case described, the payment was the cash equivalent of leave salary received at retirement. This converts unused leave entitlement into a retirement payment.

Section 10(10AA) covers this payment for income-tax purposes. The exemption is not identical for everyone. The article states that government employees have no such upper limit, while non-government employees claim exemption subject to the applicable ceiling. For non-government employees, that ceiling was Rs 3 lakh and was later revised to Rs 25 lakh.

The distinction shaped the SBI retiree’s dispute. He received Rs 9.29 lakh and claimed the whole amount as exempt. The officer initially allowed only Rs 3 lakh, but ITAT Jaipur later directed full exemption. The tribunal did not treat SBI staff as government employees; it applied the revised ceiling as remedial relief.

The tax officer initially followed the exemption limit that applied when the employee retired in 2020. For non-government employees, that limit was then Rs 3 lakh. Since the retiree received Rs 9.29 lakh, the amount above the ceiling was treated as taxable.

The calculation was straightforward: Rs 9.29 lakh received minus Rs 3 lakh exempt equalled Rs 6.29 lakh. The officer added that amount to the retiree’s income. His return had reported total income of Rs 6.76 lakh from pension and other sources, so the adjustment increased the total to Rs 13.05 lakh.

The Commissioner of Income Tax (Appeals) upheld the adjustment, relying on the Delhi High Court’s decision in Kamal Kumar Kalia v. Union of India. ITAT Jaipur later disagreed with the outcome, treating the Rs 25 lakh revision as remedial and directing the officer to delete the Rs 6.29 lakh addition.

For Section 10(10AA), the law distinguishes government employees from other employees. The article states that staff of SBI are treated as non-government employees for leave-encashment exemption. That classification matters because non-government employees face an exemption ceiling.

The Delhi High Court’s decision in Kamal Kumar Kalia v. Union of India upheld this distinction. It ruled that employees of public-sector undertakings and nationalised banks could not claim the same status as government employees for this purpose. Therefore, the SBI retiree could not rely on the unlimited treatment described for government employees.

ITAT Jaipur followed that classification but still granted relief. It did not say SBI employees were government employees. Instead, it held that the later Rs 25 lakh ceiling was remedial and could apply to the retiree’s payment. Thus, the case turned on the timing and purpose of the limit, not on changing SBI’s employee category.

The tribunal applied the Rs 25 lakh ceiling because it viewed the 2023 revision as remedial. In its reasoning, the limit had remained at Rs 3 lakh since 2002, even as salaries were repeatedly revised. The higher ceiling therefore corrected an outdated threshold rather than creating an entirely new benefit.

The SBI employee retired in 2020 and received Rs 9.29 lakh. Under the old ceiling, Rs 6.29 lakh would have been taxable. ITAT Jaipur said the payment was well within Rs 25 lakh and directed the Assessing Officer to allow full exemption under Section 10(10AA). It also referred to consistent decisions by its Coordinate Benches.

The tribunal said denying the revised benefit to an employee who retired shortly before the notification would perpetuate the disparity the revision was meant to remove. This approach helped the retiree, but the article does not state how every future case will be decided. The decision specifically concerned this appeal and its facts.

A tax exemption generally means qualifying income is excluded from taxable income, either fully or up to a specified ceiling. The conditions decide who can claim it, while the limit decides how much can be sheltered. Amounts outside the exemption may remain taxable. These rules can differ between government and non-government employees.

In this case, Section 10(10AA) covered leave encashment received at retirement. SBI employees remained classified as non-government employees, so the category did not change. The amount limit did change: the ceiling moved from Rs 3 lakh to Rs 25 lakh. ITAT Jaipur treated that increase as a remedial correction.

This shows how eligibility and amount are separate questions. A government may revise the ceiling to reflect changed salaries or correct an outdated threshold without expanding the group covered by the exemption. The article’s ruling applied that reasoning to the SBI retiree, but does not establish a universal result for every tax case.