How leave encashment is calculated
Leave encashment pays an employee for earned or privilege leave they did not use. The per-day value is basic plus dearness allowance divided by 30 in most company policies, or by 26 where the wage structure is daily-rated. Multiply by the encashable days to get the gross payout. Casual and sick leave are usually not encashable, and most policies cap encashment at the carry-forward limit, for example 30 or 45 days, so the calculator lets you enter the eligible days directly.
Encashment happens at three points: annually for balances above the carry-forward cap, at resignation or termination, and at retirement. The tax treatment differs. Encashment received while in service is fully taxable as salary. Encashment on leaving is exempt for non-government employees up to ₹25 lakh, a limit raised from ₹3 lakh with effect from 1 April 2023, subject to the conditions in Section 10(10AA).
- Per-day wage = (Basic + DA) ÷ 30 (or ÷ 26 by policy)
- Encashment = Per-day wage × Encashable leave days
- In-service encashment: fully taxable
- On exit or retirement: exempt up to ₹25 lakh (non-government), balance taxable
Keeping leave balances audit-ready
Encashment disputes usually trace back to a leave balance nobody can reconstruct. Balances should accrue monthly from attendance, deduct approved leave, expire or carry forward per policy at year end, and be visible to the employee. When that ledger exists, the encashment figure at exit is a lookup rather than a negotiation.