The leave encashment is non-taxable on resignation\retirement as per Section 10(10AA) clauses.
Section 10AA - Clarified here :
http://www.incometaxindia.gov.in/acts/income%20tax%20act/10.asp
Resignation from company is retirement and part of exemption, as retirement is considered here more than once in a year by multiple employers that could only happen on resignation.
(10AA)
(i) any payment received by an employee of the Central Government or a State Government as the cash equivalent of the leave salary in respect of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise;
(ii) any payment of the nature referred to in sub-clause (i) received by an employee, other than an employee of the Central Government or a State Government, in respect of so much of the period of earned leave at his credit at the time of his retirement whether on superannuation or otherwise as does not exceed ten months, calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement whether on superannuation or otherwise, subject to such limit as the Central Government may, by notification in the Official Gazette, specify in this behalf having regard to the limit applicable in this behalf to the employees of that Government:
Provided that where any such payments are received by an employee from more than one employer in the same previous year, the aggregate amount exempt from income-tax under this sub-clause shall not exceed the limit so specified:
Provided further that where any such payment or payments was or were received in any one or more earlier previous years also and the whole or any part of the amount of such payment or payments was or were not included in the total income of the assessee of such previous year or years, the amount exempt from income-tax under this sub-clause shall not exceed the limit so specified, as reduced by the amount or, as the case may be, the aggregate amount not included in the total income of any such previous year or years.
Explanation.-For the purposes of sub-clause (ii),- the entitlement to earned leave of an employee shall not exceed thirty days for every year of actual service rendered by him as an employee of the employer from whose service he has retired;
LEAVE ENCASHMENT (Section 10(10AA)):
(i) Leave Encashment during service is fully taxable in all cases, relief u/s 89(1) if applicable may be claimed for the same.
(ii) Any payment by way of leave encashment received by Central & State Govt. employees at the time of retirement in respect of the period of earned leave at credit is fully exempt.
(iii) In case of other employees, the exemption is to be limited to the least of following: (a) Cash equivalent of unutilized earned leave (earned leave entitlement can not exceed 30 days for every year of actual service) (b) 10 months average salary (c) Leave encashment actually received. This is further subject to a limit of Rs.3,00,000 for retirements after 02.04.1998.
(iv) Leave salary paid to legal heirs of a deceased employee in respect of privilege leave standing to the credit of such employee at the time of death is not taxable.
For the purpose of Section 10(10AA), the term ‘Superannuation or otherwise’ covers resignation (CIT Vs. R.V. Shahney 159 ITR 160(Madras).
The Central Board of Direct Taxes in the reference of Section 10(10AA). Circular No. 394 dated September 14, 1984 [1984] 150 ITR ( St. ) 3).
"The other amendment has been made in section 10(10AA) of the Act to clarify that the exemption under the aforesaid provision shall be allowed only where the payment is received by the employee on his retirement, whether on superannuation or otherwise. " http://law.incometaxindia.gov.in/DitTaxmann/IncomeTaxActs/2009ITAct/%5B2005%5D145TAXMAN0256(ALL).htm
SECTION 10(10AA)
OR OTHERWISE
n The phrase �or otherwise� will cover only such an eventuality when there is severance of relationship of employer and employee or contract of employment - CIT v. Ram Rattan Lal Verma [2005] 145 Taxman 256 (All.).
n The words �or otherwise� in section 10(10AA) are of very wide amplitude. These words shall draw the restricted meaning qua the immediately preceding word �superannuation�. The superannuation is an employee�s severance of relationship of contract of employment in between employer and employee. After attaining a specified age, an employee ceases to be an employee ipso facto in pursuance of terms and conditions governing the employment. The phrase �or otherwise� will cover only such an eventuality when there is severance of relationship of employer and employee and contract of employment - CIT v. Vijai Pal Singh [2005] 144 Taxman 504/CIT v. Ashok Kumar Dixit [2005] 273 ITR 126 (All.).
RETIREMENT - SUB-CLAUSE (i)
n The word �retirement� has not been used in clause (10AA) of section 10 in the restricted sense to mean �retirement on superannuation�. On the other hand, it is clear from the language of clause (10AA) itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise - CIT v. D.P. Malhotra [1997] 142 CTR (Bom.) 325.