How encashment is calculated
The standard formula is (basic + DA) divided by the policy divisor, multiplied by the number of encashable days. Most companies use 30 as the divisor for monthly-salaried staff and 26 for daily-rated or minimum-wage workers, mirroring how they compute per-day wages for LOP. The Factories Act requires leave wages on discharge or quitting to be paid on the same basis as leave taken, so a worker's average daily wage is the reference for factory workers.
Only earned leave (privilege leave) is normally encashable. Casual and sick leave are meant to be used, not banked, and most state Shops and Establishments Acts do not require them to be paid out. Your leave policy should state the divisor, the components included and the maximum days that can be encashed.
- Per-day rate = (basic + DA) ÷ 30 (or ÷ 26 for daily-rated workers)
- Encashment = per-day rate × encashable EL balance
- Cap the balance at the carry-forward limit in your policy (30 days for factory workers under the Factories Act)
- Pay it within the full and final settlement, together with unpaid salary and gratuity where due
When it is paid and how it is taxed
The two triggers are exit and annual policy encashment. On exit, the unused EL balance is paid with the final settlement. In service, some companies allow a fixed number of days to be encashed each year, usually the days that would otherwise lapse above the carry-forward cap.
Tax treatment differs by trigger. Encashment received while in service is fully taxable as salary and TDS applies in the month it is paid. Encashment on retirement or resignation is exempt for non-government employees up to ₹25 lakh across the working life, subject to the conditions in the Income Tax Act; government employees are fully exempt. Leave encashment is generally not treated as basic wages for EPF contribution.
Common mistakes
The first error is computing encashment on CTC or gross rather than basic plus DA, which overpays. The second is encashing a balance that was never accrued correctly because leave was tracked on paper and carry-forward was never capped. The third is forgetting to deduct TDS on in-service encashment, which surfaces as a Form 16 mismatch.
- Reconcile the EL balance against the leave register before final settlement
- Do not encash casual or sick leave unless your policy or state Act requires it
- Apply the ₹25 lakh exemption only on retirement or resignation, not on annual encashment
A site supervisor with basic plus DA of ₹18,000 resigns with 22 days of earned leave unused. Under a 30-day divisor his per-day rate is ₹600 and the encashment is ₹13,200. If the company's policy used a 26-day divisor instead, the rate would be ₹692.31 and the payout ₹15,231. Because the payment is on resignation, it falls within the ₹25 lakh lifetime exemption and no tax is deducted on it, though it still appears in his full and final statement.
Attend Mitra keeps leave balances with accrual rules per leave type, so the earned-leave balance at the time of exit comes from the record rather than a reconstructed spreadsheet. The amount can then be entered as an earning in the attendance-linked payroll run and appears on the final payslip PDF.