From 01.01.2019 to 01.01.2026, amounts up to 8,000 manats were exempt from income tax when calculating the salaries of employees working in the non-oil and non-state sectors. As of January 1st of this year, a 3% income tax has started to be applied to the salaries of employees working in the private sector.
According to Article 102.1.6 of the Tax Code, the 200 manat portion of salary amounts up to 2,500 manats for employees working at their main place of employment is exempt from tax.
The introduction of this novelty into legislation raises certain questions regarding the calculation and taxability of other incomes. If compensation for unused leave is paid to employees who worked in previous years and did not use their annual leave entitlement, will that amount be subject to income tax?
Modern.az reports that economist expert Mahmud Abasquliyev commented on the matter:
"We can unequivocally say “yes” to this question. This is because the employee will receive compensation for unused leave in 2026. That is, since this compensation amount constitutes the employee's income for the current year, it will be subject to income tax under the new rule. If the compensation amount calculated for an employee working at their main place of employment is less than 2,500 manats, then the 200 manat exemption amount will also be applied, and the remaining portion will be subject to 3% income tax. Social insurance payments will be withheld in accordance with the requirements of existing legislation.
When compensation for leave calculated for previous years is paid in the corresponding month of the current year, it will be shown separately in the unified quarterly report, and the concession for the main place of employment will be applied.
The calculation and payment of compensation for leave calculated for previous years are regulated by Articles 111 and 135 of the Labor Code".
Example: An employee works as a chief accountant in the private sector, and their salary is 1,500 manats. Although they have been working since 2022, they have not taken leave. The chief accountant wishes to receive compensation in 2026 for unused leave from previous years. Suppose a compensation amount of 2,000 manats has been calculated for this. In this case, that amount will now be subject to income tax.
Amount subject to income tax: 2,000 – 200 = 1,800 manats;
Income tax = 1,800 x 3% = 54 manats;
Amount of mandatory state social insurance (MDSS) withheld from employee: 200 x 3% + (2,000 – 200) x 10% = 186 manats;
Unemployment insurance premium withheld from employee: 2,000 x 0.5% = 10 manats;
Mandatory medical insurance premium withheld from employee: 2,000 x 2% = 40 manats;
Net compensation amount: 2,000 – 54 – 186 – 10 – 40 = 1,710 manats. (Vergiler.az)
