Leave Encashment
Leave encashment is the cash payment an employee receives for unused earned leave at the time of resignation, retirement, or per company policy. It is calculated on basic + DA at the leave balance date.
What is Leave Encashment?
Leave encashment converts accrued earned (privilege) leaves into cash. Most companies allow encashment only at exit; some allow it annually. Tax treatment depends on the type of employer and the reason for encashment. It is fully exempt for government employees at retirement, and partially exempt (up to ₹25 lakh) for non-government employees at retirement.
Formula: Leave Encashment = (Basic + DA) ÷ 30 × Number of unutilised leave days
Example
Employee with Basic + DA of ₹30,000 and 20 unused earned leaves: Encashment = 30,000 ÷ 30 × 20 = ₹20,000
How Leave Encashment is used
Leave encashment is paid as part of full-and-final (F&F) settlement at exit. Some companies allow employees to encash leave at year-end above a cap.
Leave Encashment FAQs
Is leave encashment taxable?
For non-government employees, it is tax-exempt up to ₹25 lakh at retirement. If encashed during service, it is fully taxable.
Which leaves can be encashed?
Typically only earned or privilege leave (EL or PL). Sick leave and casual leave are usually not encashable.
Can I encash leave every year?
Depends on company policy. Many employers cap accrual at 30 to 60 leaves and require encashment of the excess.