A Bangalore tax tribunal says leave encashment remains fully exempt when it was earned during Central Government service, even if the employee later moved to BSNL, provided the records support the claim.
A Bangalore tax tribunal has ruled that leave encashment earned during Central Government service does not lose its tax-free character simply because the employee later retired from Bharat Sanchar Nigam Ltd, or BSNL. The decision, in Bindumadavan Prakash’s case, turns on the source of the leave rather than the identity of the final employer, and it offers a useful clarification for former government staff absorbed into public-sector undertakings.
According to the tribunal order, Prakash joined the Department of Telecommunications in 1978, was absorbed into BSNL in 2000 and retired in 2019. BSNL issued a certificate saying the encashed leave related to his earlier government service, and the tribunal accepted that factual position. It held that absorption into BSNL did not alter the character of the leave already accumulated under the Central Government, and it deleted the tax adjustment of Rs. 4,26,190.
The dispute centred on Section 10(10AA) of the Income Tax Act, which treats leave encashment differently for government and non-government employees. Official guidance from the Income Tax Department sets out a full exemption for qualifying leave encashment received by Central or State Government employees, while other workers are subject to a monetary cap and additional conditions. The Central Board of Direct Taxes raised that ceiling for non-government salaried employees to Rs. 25 lakh from 1 April 2023, underscoring the importance of which category a retiree falls into.
The Bangalore bench also relied on an earlier Ahmedabad tribunal ruling in Pradipkumar Bhogilal Modi, a similar case involving a former government employee absorbed into BSNL. In that matter too, the tribunal accepted that the leave had been earned during government service and found the tax authorities had not properly accounted for the supporting documents. Together, the two rulings point to a consistent approach: the relevant question is when the leave was earned, not simply where the employee retired from.
The practical message is that documentation matters. Service records, absorption orders, leave accounts and any certificate from the PSU linking the encashment to the earlier government posting can all be decisive. The ruling is not a blanket exemption for every BSNL retiree, particularly where leave was earned partly under government service and partly after absorption. But for employees able to prove that the encashed amount arose from Central Government leave, the tribunal has confirmed that a later move to BSNL does not by itself reduce the exemption.
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