Leave encashment is the process of calculating and crediting the amount of cash in exchange for an employee’s unused paid leaves. Employees can save their leaves to receive money when they leave their job or retire. Leave encashment is included in the employee’s full and final settlement.
The leave encashment policy differs from company to company, and the rules vary. Some companies usually pay for the leaves taken, or some adjust them in the next calendar year.
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To encash your leaves, you need to know the types of leaves, and which of them can be encashed. Here are different types of leaves:
| Leave Type | Description | Eligibility for Encashment |
| Casual Leave | Commonly used leave with a duration of 7 to 10 days. Must inform employer for encashment. | Eligible |
| Privilege Leave | Requires prior notice and varies by organization. Eligible for encashment after a period. | Eligibility varies |
| Medical Leave or Sick Leave | For health conditions, requires employer notice. Eligible for encashment, but not long-term. | Eligible (Excluding long-term) |
| Sabbaticals | For upskilling, paid and reimbursed by the organization. Eligible for encashment. | Eligible |
| Holiday Leaves | Paid leaves, no salary deduction. Eligible for encashment. | Eligible |
| Maternity Leave | Available to pregnant employees, varies in duration. Not eligible for encashment. | Not eligible |
| Compensatory Leave / Comp Off | Comp off is paid time off given to employees in exchange for working overtime or on holidays. | Not eligible |
| Floater Leave | A short period of leave an employee can take on a chosen workday, subject to company approval. | Eligibility varies |
| National Holiday | A designated paid day off to commemorate a national event. | Not eligible |
| Marriage Leave | Paid leave granted to an employee specifically for getting married. | Not eligible |
| Unpaid Leave | A period of leave an employee takes without receiving regular pay. | Not eligible |
Any leave is available for encashment during service, at retirement, or when a person resigns. When encashed during the service period, it is fully taxable and part of the salary income. However, one can claim some relief under Section 89 of the Income Tax Act.
Leaves encashed while the employee is still employed are subject to taxation since the amount encashed becomes part of the “income from salary” head.
Tax benefits under Section 89 apply to this head, and employees can save tax by filling out Form 10E to claim tax relief.
When any leave is encashed at retirement or resignation, one can avail of certain partial and complete exemptions. The conditions for exemption are:
The formula to calculate leave encashment amount:
[(Basic Salary + Dearness Allowance)/30] x Number of Earned Leaves
To understand how the leave encashment is calculated, here is an example:
Mrs Shanaya is retiring after 20 years of service. She was entitled to 25 days of paid leave per annum from her company, meaning she had 500 days of leave during her entire service to the company.
Out of this, Mrs Shanaya has already utilised 150 days of paid leave. She is left with 350 days of unutilised leave.
Now, as for her salary, she is drawing a basic salary plus a dearness allowance (DA) of Rs 35,000 per month at the time of retirement.
Now, leave encashment is calculated based on the number of unutilised leaves multiplied by salary per day, which would be calculated as:
Salary per day = 35,000/30 = Rs. 1167 (approx)
Leave encashment received = 350*1167 = 4,08,450
Thus, Mrs Shanaya received an amount of Rs 4,08,450 as leave encashment.
| Particulars | Amount in Rs |
| Leave encashment received | 4,08,450 |
| Tax exemption: least of the following |
1. Amount notified by the government
2. Actual leave encashment
3. Average salary for 10 months (35000*10)
Leave encashment allows employees to convert their unutilized paid leave days into monetary compensation. The specific process can vary depending on the company’s leave policy, but here’s a general breakdown:
The employee ends the year with a certain amount of unused leaves which are eligible for encashment.
The employee submits a formal request which may involve filling out a leave encashment form or submitting a written request to HR.
The HR department will calculate the encashment amount based on your company’s policy. This often involves multiplying your daily salary (basic pay + dearness allowance) by the number of days being encashed.
Your manager or HR might need to approve the request based on operational needs and your leave balance.
Once approved, the encashment amount will be included in your final salary or paid out separately depending on company policy. Taxes are also deducted from this final payment if applicable.
The longer an employee works for a company, the more complex the calculations for leave encashment become. Leave all the tedious calculation work to RazorpayX Payroll and focus on what you do the best – managing your business!
