Leave encashment that you get while still working is generally taxed as salary for both government and non-government employees. But if you receive leave encashment at the time of retirement, then the tax rules change a bit. For non-government employees, like those in the private sector or public sector undertakings (PSUs) there's a limit on the tax exemption based on the Income Tax Act, and any amount over that limit will be taxed.
On the other hand, Central and State Government employees enjoy a full tax exemption on the entire leave encashment amount that they receive upon retirement, thanks to Section 10(10AA)(i).
