Pension and Leave salary

15/11/2023 1 By indiafreenotes

Pension and leave salary are crucial components of an employee’s financial package, contributing to financial security during retirement. Employers need to ensure compliance with relevant regulations, and employees should be aware of the tax implications associated with these benefits. Additionally, the specific rules and regulations governing pensions and leave salary can vary based on the country and industry, so it’s essential to consider the applicable legal framework in each case.


A pension is a financial benefit provided to employees upon their retirement. It serves as a source of income for individuals who have completed their years of service with an employer.


  • Accumulation: Employees contribute a portion of their salary towards a pension fund during their active service.
  • Employer Contribution: In many cases, employers also contribute to the pension fund, enhancing the retirement corpus.
  • Annuity or Lump Sum: At the time of retirement, the accumulated amount is paid out to the employee either as a monthly annuity or as a lump sum.

Types of Pensions:

  • Defined Benefit Plan: The pension amount is predefined based on factors like salary and years of service.
  • Defined Contribution Plan: The pension depends on the amount accumulated in the employee’s pension account, influenced by both employee and employer contributions and investment returns.

Government Pensions:

  • Government employees often receive pensions based on a predefined formula, ensuring a fixed amount post-retirement.

Tax Implications:

  • Pension income is taxable as per the individual’s income tax slab.

Leave Salary:

Leave salary refers to the payment made to an employee for the leave not availed during their service. This can include accrued but unused vacation or earned leave.


  • Accrual: Employees typically earn leave during their service, and if they don’t utilize this leave, it accumulates.
  • Encashment: Leave salary can be encashed either partially or entirely at the time of retirement or resignation.


  • Leave salary is often calculated based on the employee’s last drawn salary and the number of accumulated leave days.

Tax Implications:

  • The tax treatment of leave salary varies based on whether the leave encashment is received during service or at the time of retirement.
  • Leave encashment during service is taxable as salary income.
  • Leave encashment at the time of retirement is exempt up to a certain limit under Section 10(10AA) of the Income Tax Act. Any amount beyond this limit is taxable.



  • Pension: Primarily serves as a retirement income.
  • Leave Salary: Compensates employees for accrued but unused leave.


  • Pension: Accumulates over the years with regular contributions.
  • Leave Salary: Accrues as employees earn and do not utilize leave.

Payment Structure:

  • Pension: Paid as a regular stream of income (annuity) or as a lump sum.
  • Leave Salary: Paid as a one-time payment upon retirement or resignation.

Tax Treatment:

  • Pension: Taxable as per income tax slabs.
  • Leave Salary: Tax treatment varies based on when it is received (during service or at retirement) and the applicable exemptions.