What Is Leave Encashment?
Leave encashment is the process of converting an employee's unused accrued leave (typically Earned Leave) into a monetary payment — commonly processed at the time of resignation, retirement, or as part of an organization's periodic (often annual) encashment policy.
Leave Encashment Calculation Formula
Leave Encashment Amount = (Last Drawn Basic Salary + DA, if applicable) ÷ 26 (or applicable working days divisor) × Number of Unused Leave Days Being Encashed.
Tax Treatment of Leave Encashment
- Leave encashment received during active employment (as part of an annual encashment policy) is generally fully taxable as part of salary income.
- Leave encashment received at retirement or resignation is exempt from tax up to a specified limit under Section 10(10AA) of the Income Tax Act, for private sector employees, with different treatment for government employees who often receive fuller exemption.
- The exemption is calculated as the lowest of several specified limits, including actual leave encashment received, 10 months' average salary, and the cash equivalent of leave standing to the employee's credit (subject to a maximum of 30 days per year of service).
When Leave Encashment Typically Applies
- At resignation or retirement, encashing the full unused Earned Leave balance
- As part of an annual 'use it or lose it' policy, where companies allow encashment of leave beyond a certain carry-forward cap
- In case of an employee's death, payable to the nominee/legal heir
How HR Software Helps
Payroll systems automatically calculate leave encashment amounts based on the correct formula and current leave balance, and apply the appropriate tax treatment based on whether the encashment occurs during employment or at exit.
See how Trilliant Software automates this →Leave Encashment: Frequently Asked Questions
Is leave encashment mandatory in India?
Can Casual Leave be encashed?
This glossary entry is for general information and reflects common HR practice in India at the time of writing. Statutory thresholds, rates and deadlines change — verify against the latest official notifications or consult a qualified legal or tax advisor before acting.