Can retirees claim enhanced ₹25L leave encashment exemption for pre-2023 years? ITAT ruling explained

Retirees who could claim just ₹ 3 lakh as leave encashment tax exemption before 2023 may now have an opportunity to seek relief. The Income Tax Appellate Tribunal (ITAT), Chennai, said in a recent order that the enhanced ₹ 25 lakh exemption limit introduced on May 24, 2023 can be applied retrospectively.

In an order dated June 12, 2026, the ITAT noted that both PSU (public-sector undertaking) and private-sector retired employees can benefit from the enhanced leave encashment exemption limit, including those who had already paid tax on leave encashment exceeding ₹ 3 lakh.

The higher limit of leave encashment tax exemption applies to the period of earned leave in the credit of the employee at the time of retirement whether on superannuation or otherwise, the Central Board of Direct Taxes ( CBDT ) said in its notification at that time.

The ITAT's ruling was given in the case of Vattikundala Prabhakara Rao, a retired ONGC employee, who received ₹ 19.05 lakh as leave encashment on superannuation during FY 2019-20,

While filing his income tax return ( ITR ) for AY 2020-21, Rao claimed the entire amount as exempt under Section 10(10AA)(ii) of the Income-tax Act, 1061. However, the Centralised Processing Centre, Bengaluru, restricted the exemption to ₹ 3 lakh and taxed the remaining amount.

Subsequently, he filed an appeal for his tax exemption claim, which was dismissed by the Commissioner of Income Tax Appeals. They held 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 before the ITAT was delayed by 1,023 days. However, the Tribunal condoned the delay, observing 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, challenging the ₹ 3 lakh exemption cap.

According to an Upstox report, the Revenue's counsel argued that the enhanced exemption limit applied only from April 1, 2023, and therefore could not benefit the assessee for AY 2020-21.