Encashment of terminal benefits up to ₹25 lakh is tax-free, provided it is approved and paid by the employer. The exemption is only available to private sector employees in India.
The benefit is applicable to encashment of Leave Encashment (salary for unused leave) provided it is less than the total leave balance as on the date of retirement or separation.
For the calculation of tax deduction limit, it includes salary/ leave encashment, commutation of pension, gratuity, and leave encashment up to ₹25 lakh.
The tax exemption under this section is limited to the benefits received from the employer and not from any other source. This means that the benefit received from any other source or the funds transferred to the employee or any trust, pension fund or deposits made in the name of the employee will not be considered for the exemption under this section.