Leave encashment benefits received by the salaried class at retirement, whose limit has been hiked from ₹3 lakh to ₹25 lakh in the Budget, will be tax-free in their hands under the new income tax regime even if they switch to it in the year of retirement, Revenue Secretary Sanjay Malhotra told The Hindu on Monday.
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“If you ask how it helps the middle class, 50% of personal income taxpayers are salaried and they will benefit from the higher leave encashment limit at the time of retirement whether they choose the new tax regime now or the old today... That’s what a lot of people are missing,” Mr. Malhotra said, dismissing critiques of limited benefits for the middle class beyond the new tax system.
“So it benefits all the salaried class… there is something for them which they are not realising today. But everyone has to retire someday and I’m pretty confident that in the year they retire, they will all opt for the new regime,” he asserted, explaining that this will translate into savings of almost ₹7 lakh in taxes under the old system on the ₹22 lakh hike in the limit. “That is almost ₹20,000 of savings a year over a 33-year working life,” he pointed out.
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A majority of the non-salaried will shift to the new system as well, he averred. Only those salaried people who are getting a substantial tax-exempt house rent allowance (HRA) or some who have taken home loans, will not shift to the new tax system, Mr. Malhotra noted.
“But non-salaried people don’t have an HRA so mostly, they will also shift. So 50% of salaried, whether they shift or not, there is a benefit and a majority of non-salaried will shift, salaried whether they shift or not, there is something for them which they are not realising today. But everyone will retire one day.
The Revenue Secretary acknowledged that leave encashment benefits may not be available to all salaried employees presently. “But now that this benefit is there, I am quite sure companies will restructure their emoluments structure,” he concluded.