A retired employee of the Oil and Natural Gas Corporation (ONGC) has secured a significant victory against the Income Tax Department, with the Income Tax Appellate Tribunal (ITAT) Chennai ruling in his favor regarding leave encashment tax exemption.
Balasubramanian Venkatachalaperumal, who retired from ONGC in the financial year 2019-20, received ₹19.06 lakh as leave encashment. When filing his income tax return, he claimed full exemption on this amount under Section 10(10AA)(ii) of the Income-tax Act.
Tax Department Limits Exemption to ₹3 Lakh
However, the Centralised Processing Centre (CPC) in Bengaluru processed his return by restricting the exemption to just ₹3 lakh, adding the remaining amount to his taxable income. This adjustment significantly increased his total declared income.
Venkatachalaperumal challenged this decision, arguing that employees of Public Sector Undertakings (PSUs) should receive similar benefits to central or state government employees regarding leave encashment exemptions. He contended that the ₹3 lakh limit, set in 2002, was outdated and should be revised to match the ₹25 lakh exemption available to government employees, especially since no subsequent notification had altered the rule for non-government employees.
CIT (Appeals) Rejects Claim, ITAT Chennai Rules in Favor
The Commissioner of Income Tax (Appeals) initially rejected Venkatachalaperumal's argument, stating that as a PSU employee, he could not be treated as a government employee and was thus only eligible for the ₹3 lakh exemption under the existing notification.
Undeterred, Venkatachalaperumal appealed to the ITAT Chennai. On May 4, 2026, the tribunal ruled in his favor, allowing the full ₹19.06 lakh leave encashment to be exempt from tax.
Rationale Behind the ITAT Decision
The ITAT Chennai observed that the increase in the exemption limit from ₹3 lakh to ₹25 lakh through Notification No. 31/2013 represented a major revision after nearly two decades. The tribunal highlighted that this amendment was intended to reduce the disparity between government and non-government employees, deeming it "remedial and beneficial in nature."
"The enhancement of the exemption limit from ₹3 lakh to ₹25 lakh was not a new exemption but merely a rationalisation and updating of an existing benefit to reflect current economic realities," stated Chartered Accountant Suresh Surana, commenting on the ruling.
The tribunal further noted that denying the higher exemption to employees who retired before the notification date would create an unfair distinction among taxpayers and undermine the amendment's purpose. It emphasized that beneficial provisions aimed at removing hardship should be interpreted liberally, potentially with retrospective application, particularly when no vested right of the Income Tax Department is adversely affected.
Consequently, the ITAT directed the Assessing Officer to allow Venkatachalaperumal's claim for the full ₹19.06 lakh leave encashment exemption.