ITAT Ruling Resets Leave Encashment Tax for PSU Retirees

A retired ONGC employee won a tax dispute that could shift how public sector retirees file leave encashment claims. The Chennai bench of the Income Tax Appellate Tribunal granted Balasubramanian Venkatachalaperumal an exemption on the full ₹19.06 lakh he received at retirement in FY20, setting aside the tax department's restriction to ₹3 lakh.

Venkatachalaperumal challenged the department's order after it added the difference to his taxable income, pushing it to ₹47.68 lakh from the ₹31.62 lakh he reported. The Commissioner of Income Tax (Appeals) had rejected his plea, arguing that PSU employees do not qualify for the same treatment as government employees under Section 10(10AA)(i).

The tribunal disagreed. It cited Notification No. 31/2013, which raised the exemption limit from ₹3 lakh to ₹25 lakh for all employees covered under Section 10(10AA)(ii). The department had continued applying the 2002 cap. The ITAT said the notification applies uniformly to non-government employees, including PSU retirees. Since Venkatachalaperumal's leave encashment fell below the ₹25 lakh ceiling, the entire amount qualified.

Why the ₹3 Lakh Cap Collapsed

The old cap had not been updated since 2002, despite salary inflation and rising leave balances. The 2013 notification was a deliberate shift to narrow the gap between government and non-government employees. The tax department's refusal to apply it rested on a narrow reading of who qualifies as a government employee. The tribunal rejected that reading. It directed the assessing officer to recompute the income using the ₹25 lakh threshold.

The ruling does not create a new law. It enforces an existing notification that the department had been ignoring. For any PSU retiree who filed a return after 2013 and was denied the higher exemption, the decision provides grounds to reopen the assessment.