Leave encashment = (Basic + DA) ÷ divisor × leave days encashed. The only argument is the divisor. Private companies usually pick 26 (working days in a month) or 30 (calendar days). Neither is "the law" for private employers. What matters is that your leave policy names one and you apply it the same way to everyone.
Want the number straight away? Use the leave encashment calculator. For the full background, see our main leave encashment calculation guide.
26 vs 30: what difference does it make?
Take a monthly basic + DA of ₹30,000 and 15 days to encash.
| Divisor | Per-day value | 15 days encashed |
|---|---|---|
| 26 days | ₹1,153.85 | ₹17,308 |
| 30 days | ₹1,000.00 | ₹15,000 |
The 26-day method pays about 15% more, because Sundays are left out and each working day is worth more.
HR, GPS attendance, shifts, leave, payroll, tax declarations, onboarding, engagement, projects and timesheets — one employee record behind all of it.
Start free See the demoWhich companies use which divisor?
- 26 days — common in factories, retail and companies where the month has 26 working days and salary is treated as pay for days worked. It matches the way many payroll systems already calculate loss-of-pay.
- 30 days — common in offices and IT companies, and the method used for Central Government employees (see leave encashment for central government employees).
- Actual days in the month (28–31) — rare; it makes the amount change depending on when the employee exits.
What goes into "salary" for encashment?
Most policies use Basic + DA. Some include fixed allowances such as HRA. Under the labour codes, "wages" means basic + DA + retaining allowance, and if your excluded allowances exceed 50% of total pay, the excess is added back. Bonus, overtime, employer PF and reimbursements are not included.
Worked examples
1. Resignation, office staff, ÷30 Basic + DA ₹42,000, 18 EL balance. 42,000 ÷ 30 × 18 = ₹25,200
2. Factory worker, ÷26 Basic + DA ₹19,500, 22 EL balance. 19,500 ÷ 26 × 22 = ₹16,500
3. Year-end payout of excess leave (OSH Code) An employee has 38 days of EL on 31 December. Only 30 can be carried forward, so 8 days are paid. Basic + DA ₹26,000, ÷26: 26,000 ÷ 26 × 8 = ₹8,000
The new labour code rules on leave (since 21 November 2025)
Under the Occupational Safety, Health and Working Conditions Code, 2020, for workers covered by it:
- Annual leave is earned at 1 day for every 20 days worked, once the worker has put in 180 days in the calendar year.
- At most 30 days can be carried forward to the next year. Anything above that is encashed.
- A worker can ask to encash unused leave at the end of the calendar year.
- On resignation, discharge, retrenchment or retirement, unused leave is paid out along with the full-and-final settlement.
Your state's Shops and Establishments rules may give more leave or different carry-forward limits. Where two rules apply, follow the one that is better for the employee, and check with your labour consultant.
How tax applies
| Situation | Tax treatment |
|---|---|
| Encashment while still employed (e.g. year-end payout) | Fully taxable as salary; TDS applies |
| Encashment on resignation or retirement — private sector | Exempt up to the lowest of: actual amount, 10 months' average salary, cash value of leave (max 30 days per year of service), and ₹25 lakh lifetime |
| Encashment on retirement — Central / State Government | Fully exempt |
The exemption is widely known as Section 10(10AA). The Income-tax Act, 2025 applies from 1 April 2026 with new section numbers, so ask your CA for the current reference when you file.
Common mistakes
- Using different divisors for different employees. Pick one and put it in writing.
- Encashing on gross salary when the policy says basic. It inflates the cost, and changing it back later is hard.
- Forgetting the 30-day cap. Since November 2025, letting EL pile up beyond 30 days creates a payout due at year-end.
- Doing it by hand at exit. Leave balances in a spreadsheet drift. Let attendance, leave and payroll share one record.
Automate it
MizUp BMS tracks leave accrual, applies the carry-forward cap and pulls the encashment into the final settlement automatically, using the divisor you set once. Related tools: salary calculator · gratuity calculator · F&F settlement calculator.
Frequently asked questions
What is the formula for leave encashment in a private company?
Leave encashment = (Basic + DA) ÷ divisor × number of leave days encashed. Most private companies use 26 (working days) or 30 (calendar days) as the divisor. Some include fixed allowances; check your leave policy.
Is leave encashment calculated on 26 days or 30 days?
There is no single national rule for private employers. Using 26 gives the employee a higher amount because each day is worth more. Pick one divisor, write it in the leave policy and apply it to everyone.
How much is the encashment of 15 days leave on ₹30,000 basic?
With a 26-day divisor: 30,000 ÷ 26 × 15 = ₹17,308. With a 30-day divisor: 30,000 ÷ 30 × 15 = ₹15,000.
Is leave encashment mandatory under the new labour code?
Under the OSH Code (in force since 21 November 2025), a worker can carry forward at most 30 days of annual leave. Leave beyond that must be encashed, and a worker can ask to encash leave at the end of the calendar year or when they leave. State shop rules may also apply.
Is leave encashment taxable?
Encashment while still in service is taxable as salary. Encashment on resignation or retirement is exempt for private-sector employees up to a lifetime limit of ₹25 lakh, subject to other limits. Confirm the current section reference with your CA, as the Income-tax Act, 2025 applies from 1 April 2026.
