Quick answer: leave encashment is usually (basic + DA) ÷ 30 × unused earned leave days. ₹80,000 basic and 120 unused days gives ₹3,20,000. If you are still employed, it is fully taxable. At retirement or resignation, a non-government employee can claim an exemption equal to the lowest of the amount received, ₹25 lakh (lifetime), 10 months' average salary and the cash value of leave entitlement.
Calculate yours with the leave encashment calculator. Here is how the rules work.
What leave encashment means
Employees earn paid leave during the year. If they do not use it, many organisations let them carry it forward and either use it later or convert it into money. The conversion is leave encashment. It usually applies to earned leave (also called privilege or annual leave), not casual or sick leave.
It can happen at three points:
- During service, when a policy allows employees to encash part of their balance every year
- At resignation or termination
- At retirement or death
HR, GPS attendance, shifts, leave, payroll, tax declarations, onboarding, engagement, projects and timesheets — one employee record behind all of it.
Start free See the demoThe formula
Leave encashment = daily wage × unused leave days
Most policies calculate the daily wage as (basic + DA) ÷ 30. Some use 26 working days, which gives a higher figure. A few include allowances. The policy decides; the tax law only matters for the exemption.
| Basic + DA | Days | ÷30 | ÷26 |
|---|---|---|---|
| ₹30,000 | 45 | ₹45,000 | ₹51,923 |
| ₹60,000 | 90 | ₹1,80,000 | ₹2,07,692 |
| ₹80,000 | 120 | ₹3,20,000 | ₹3,69,231 |
Labour law minimums
State shops and establishments laws, and now the Occupational Safety, Health and Working Conditions Code, give workers one day of earned leave for every 20 days worked, with carry-forward limits, and require unused leave to be encashed in certain situations such as exit. Your policy can be more generous than the law but not less. Check the rules that apply in each state where you have staff.
Taxation
While in service
Encashment during employment is added to salary and taxed at your slab rate. There is no exemption for private-sector employees, in either regime.
At retirement or resignation
For non-government employees, the exempt amount is the lowest of:
| # | Limit |
|---|---|
| 1 | Leave encashment actually received |
| 2 | ₹25,00,000, minus any exemption claimed earlier in your career |
| 3 | 10 × average monthly salary for the 10 months before retirement or resignation |
| 4 | Cash equivalent of unavailed leave, calculated on at most 30 days for every completed year of service |
Salary here is basic + DA (if part of retirement benefits) + commission as a percentage of turnover.
The ₹25 lakh limit applies to retirement or resignation on or after 1 April 2023. Before that, the limit was ₹3 lakh for more than two decades.
Central and state government employees receive leave encashment at retirement fully tax-free.
Example: resignation after eight years
| Input | Value |
|---|---|
| Basic + DA, last 10 months | ₹80,000 a month |
| Unused earned leave at exit | 120 days |
| Completed years of service | 8 |
| Earned leave availed or encashed during service | 100 days |
| Earlier exemptions | None |
- Amount received: 80,000 ÷ 30 × 120 = ₹3,20,000
- ₹25 lakh limit: ₹25,00,000
- 10 months' salary: ₹8,00,000
- Leave entitlement: 8 × 30 = 240 days, minus 100 days taken = 140 days → 80,000 ÷ 30 × 140 = ₹3,73,333
The lowest is ₹3,20,000, so the whole payout is exempt.
Example: long career, large balance
An employee retires after 30 years with ₹2,00,000 basic and 300 days of leave. Payout: 2,00,000 ÷ 30 × 300 = ₹20,00,000. Ten months' salary is also ₹20,00,000. If she availed 400 days of leave over her career, the entitlement is 30 × 30 − 400 = 500 days, worth ₹33,33,333. The lowest figure is ₹20,00,000, within the ₹25 lakh limit, so it is fully exempt.
Had her employer allowed 400 days to accumulate, the payout would be ₹26,66,667. The exemption would still stop at ₹20,00,000, the 10-months-salary limit, so ₹6,66,667 would be taxable. For very senior salaries the ₹25 lakh cap becomes the binding limit instead.
Leave encashment during service
Some employers let staff encash part of their leave balance every year, often above a minimum balance such as 15 or 30 days. It is popular with employees but has two downsides: the payment is fully taxable, and people who never take a break are more likely to burn out. If you allow it, cap the number of days per year and keep a minimum balance that must be used as time off.
Accounting for the liability
Accumulated leave is an employee benefit that companies must provide for in their accounts, usually using an actuarial valuation for larger organisations. The liability grows with every salary increase, because leave is encashed at the last drawn salary, not the salary when it was earned. Capping carry-forward and encouraging people to take leave keeps this liability under control and is healthier for the team.
Leave encashment and notice periods
When an employee resigns, many companies do not allow earned leave to be adjusted against the notice period, because they need a handover. The unused leave is encashed instead. Other policies allow it with manager approval. Whichever you choose, write it down, apply it consistently and use a good leave management software so the balance on the last day is not a matter of debate.
Designing a fair leave policy
Leave encashment is a real financial liability on the balance sheet. A clear policy keeps it predictable:
- Cap accumulation, for example at 45 or 60 days, and encourage people to take leave for their wellbeing
- Define the divisor (30 or 26) and the components included
- State when encashment is allowed: annually, at exit, or both
- Handle notice periods: many policies do not allow leave to be used against notice, but encash it instead
- Keep balances visible so employees are never surprised at exit
Summarise the leave policy in the offer letter and appointment letter, and show balances on each salary slip.
Full and final settlement
Leave encashment is paid with the last salary, gratuity if eligible, bonus dues and recoveries. Pay it within the timeline in your policy and state rules, and show the calculation on the settlement statement.
For HR teams
Accrual rules, carry-forward caps, lapses and encashment are easy to get wrong in spreadsheets, especially with employees in several states. MizUp BMS applies leave policies, accrues balances and lets employees apply for leave and track their balance, so the figure used at exit is not in dispute.
Frequently asked questions
What is the formula for leave encashment?
(Basic + DA) ÷ 30 × number of unused earned leave days. Some employers use 26 days instead of 30.
Is leave encashment taxable on resignation?
For non-government employees, part or all of it can be exempt up to ₹25 lakh over a lifetime, subject to four limits. Encashment while still in service is fully taxable.
Can an employer refuse to encash leave?
It depends on the leave policy and the state shops and establishments law or the labour codes that apply. Earned leave is commonly encashable at exit; casual and sick leave usually are not.
Is leave encashment included in gratuity?
No. They are separate payments, though both are usually paid in the full and final settlement.
Does the new tax regime allow the leave encashment exemption?
Yes. The exemption at retirement or resignation is available in both regimes.
