Taxation of types of salary like arrears, leave encashment, advance salary etc.

Tax treatment of the various types of salary is as follows:

1. Arrear salary-  It is taxable on receipt basis, if the same has not been subjected to tax earlier on due basis. However, in this case, recipient can claim relief under section 89.

2. Leave encashment- 

A salaried employee may be allowed various leaves, some may be carried forward to next year i.e can be availed in next year, and some if not availed are not allowed to carry forward to next year. When an employee,  does not avail all the leaves that were allowed to him, but instead encashes the same and earns salary on such unavailed leaves, it is called Leave Encashment.

Such amount so received on encashing the leaves, is taxable under the head salary. It is taxable if received while in service. However, subject to some conditions, certain amount is allowed as exemption from the amount so received, at the time of retirement and the balance amount is taxable.

So, computation of the same will be as follows:

Amount received as Leave Encashment                                   xxx

(-) Amount exempt                                                              xxx

Amount taxable under the head “Salary”                                  xxx

3. Advance salary-  It is taxable on receipt basis, in the assessment year relevant to previous year in which it is received. However, employee can claim relief under section 89. Do note that loan taken from employer is not taxable as advance salary.