By CA Surekha Ahuja
Retired from a PSU Bank after 1 April 2023? Your leave encashment may be exempt up to ₹25 lakh — not ₹3 lakh
One of the most common tax mistakes in retirement taxation today is the continued application of the old ₹3 lakh leave encashment exemption limit to retired PSU bank employees.
The law has changed.
But tax processing systems, payroll assumptions, and even tax return filings often continue under the old framework.
The result:
wrong tax deductions, incorrect CPC adjustments, unnecessary appeals, and blocked refunds.
The position has now become significantly clearer after:
- CBDT Notification No. 31/2023, which enhanced the exemption ceiling from ₹3 lakh to ₹25 lakh for non-government employees; and
- the recent ruling in Gyanendra Panwar v. Assistant Director of Income-tax, CPC, ITO, where the Tribunal recognised the applicability of the enhanced limit to a retired PSU bank employee.
For retired PSU bank employees, tax professionals, payroll teams and litigators, this ruling has practical and immediate importance.
This article analyses the legal framework, judicial reasoning, compliance implications, and continuity under the Income-tax Act, 2025.
The legal framework: Section 10(10AA) of the Income-tax Act, 1961
Leave encashment received at retirement is governed by Section 10(10AA).
The provision creates two legally distinct categories.
Category 1: Central Government and State Government employees
Under Section 10(10AA)(i):
Leave encashment received at retirement by Central or State Government employees is fully exempt.
No monetary ceiling applies. This exemption is absolute.
Category 2: All other employees
Under Section 10(10AA)(ii):
Employees other than Central and State Government employees are entitled to exemption subject to prescribed limits.
This category includes:
- PSU bank employees
- public sector undertaking employees
- statutory body employees
- autonomous body employees
- private sector employees
This distinction is critical. Government ownership of the employer does not convert the employee into a Government employee for this exemption. That is the core legal principle.
How leave encashment exemption is calculated for PSU bank employees
For non-government employees, exemption is restricted to the least of the following:
| Particulars | Limit |
|---|---|
| Actual leave encashment received | Actual receipt |
| Leave standing to employee’s credit | As per service rules |
| Average salary of preceding 10 months | Statutory salary basis |
| Government notified ceiling | ₹25 lakh |
This is where CBDT Notification 31/2023 changed the practical tax position.
CBDT Notification No. 31/2023: The ₹25 lakh enhancement
The Central Board of Direct Taxes, through Notification No. 31/2023 dated 24 May 2023, enhanced the exemption ceiling from ₹3 lakh to ₹25 lakh for non-government salaried employees.
The notification applies with effect from 1 April 2023.
This means: for retirements on or after 1 April 2023, the applicable statutory ceiling under Section 10(10AA)(ii) is ₹25 lakh. Not ₹3 lakh. This enhancement fundamentally changes retirement taxation for PSU employees.
Why the dispute arose despite the notification
In practice, many returns were processed incorrectly.
Common reasons:
- CPC systems applying historical logic
- payroll teams not updating exemption treatment
- Form 16 reporting errors
- misunderstanding of PSU employee classification
This created unnecessary tax demands. The ITAT decision in Gyanendra Panwar addresses this exact issue.
The ITAT ruling in Gyanendra Panwar: What exactly was decided
The taxpayer, a retired employee of Bank of Baroda, received approximately ₹9.27 lakh as leave encashment after retirement.
He claimed exemption under Section 10(10AA).
CPC restricted the exemption to ₹3 lakh while processing the return under Section 143(1).
The matter reached the Tribunal.
The Tribunal clarified the law decisively.
Key legal findings of the Tribunal
1. PSU bank employees are not Government employees
This is an established legal position.
A PSU bank may be government-controlled, but it remains a separate legal employer.
Therefore:
Section 10(10AA)(i) does not apply. Unlimited exemption is unavailable.
2. PSU bank employees fall under “other employees”
This is where the benefit lies.
They are governed by Section 10(10AA)(ii).
And Section 10(10AA)(ii) now carries the ₹25 lakh ceiling.
3. The revised ₹25 lakh ceiling applies from 1 April 2023
This is the decisive legal ratio.
Where retirement and leave encashment arise after 1 April 2023:
the old ₹3 lakh ceiling cannot be imposed.
4. Actual amount received within statutory limits is fully exempt
Since the amount in dispute was ₹9.27 lakh, and it fell within statutory computation limits, the entire amount qualified for exemption.
This is the practical takeaway.
Practical tax illustration
Suppose a retired PSU bank employee receives:
| Particulars | Amount |
|---|---|
| Leave encashment received | ₹12,80,000 |
| Average 10-month salary | ₹14,20,000 |
| Leave standing to credit | ₹13,50,000 |
| CBDT notified limit | ₹25,00,000 |
Exemption will be the least.
Result:
₹12,80,000 exempt, Taxable amount Nil
Under the old ₹3 lakh limit, ₹9.80 lakh would have wrongly become taxable.
That difference is substantial.
Position under the Income-tax Act, 2025
The new Income-tax Act, 2025 has reorganised exemption provisions.
However, the substantive architecture remains intact.
The new law continues:
- separate treatment for Government employees
- limited exemption for non-government employees
- notified monetary ceiling framework
- salary-linked exemption formula
Therefore, the tax principle remains unchanged.
The ₹25 lakh ceiling continues. This ensures legal continuity.
What if retirement happened before 1 April 2023?
This requires careful litigation strategy.
The notification is effective prospectively.
But depending on facts, remedies may still be explored.
1. Rectification under Section 154
Possible where there is an apparent legal error.
2. Revised return
Possible if time limit remains open.
3. Appeal against Section 143(1) adjustment
Where CPC has wrongly restricted exemption.
4. Condonation under Section 119(2)(b)
Useful where refund claims were omitted. Each case must be fact-tested.
Action points for retired PSU bank employees
Before filing or revising return:
✔ verify leave encashment amount
✔ verify exemption disclosure
✔ review Form 16
✔ review CPC intimation
✔ verify tax deducted
✔ initiate correction where required
Small mistakes can create large tax leakage.
Action points for PSU banks and payroll teams
Payroll teams should immediately:
- update leave encashment exemption logic
- align retirement settlement tax treatment
- correct Form 16 disclosures
- prevent excess TDS deduction
- guide retiring employees properly
Payroll mistakes become litigation problems.
Professional significance of the ITAT ruling
The ruling in Gyanendra Panwar v. Assistant Director of Income-tax, CPC, ITO is likely to become an important salary-tax reference point.
Its practical use extends to:
- rectification petitions
- appellate matters
- refund claims
- retirement advisory
- payroll tax review
The decision closes an important practical gap between statutory amendment and tax processing.
Conclusion
The legal position is now substantially clear.
A PSU bank employee is not a Government employee for leave encashment exemption purposes.
But after CBDT Notification No. 31/2023, that does not mean exemption remains restricted to ₹3 lakh.
For retirement on or after 1 April 2023:
the exemption ceiling is ₹25 lakh under Section 10(10AA), subject to statutory computation.
The ITAT in Gyanendra Panwar has reinforced that this enhanced ceiling must be respected.
For taxpayers, this means relief.
For professionals, this means a stronger litigation and advisory position.
For payroll teams, this means immediate compliance correction.
Tax law changes on paper.
Tax relief becomes real only when correctly applied.
