Calculating the payout
Leave encashment converts unused earned leave into money. The usual formula is (basic + DA) ÷ 30 × unused leave days. Some organisations divide by 26 working days, which gives a higher daily rate, and a few include other allowances. The calculator lets you choose 30 or 26 days.
How much is tax-free
If you are still employed and encash leave, the whole amount is taxable as salary. At retirement or when you resign, a non-government employee can claim an exemption that is the lowest of four amounts:
- The leave encashment actually received
- ₹25 lakh, reduced by any exemption claimed with earlier employers
- 10 months of average salary (basic + DA, and commission linked to turnover) for the 10 months before leaving
- Cash equivalent of unused leave, counting at most 30 days for each completed year of service
The ₹25 lakh limit applies to exits on or after 1 April 2023. Government employees receive leave encashment on retirement fully exempt.
Example
| Input | Value |
|---|---|
| Basic + DA | ₹80,000 a month |
| Unused earned leave | 120 days |
| Completed service | 8 years |
| Leave already taken | 100 days |
| Payout (÷30) | ₹3,20,000 |
| Leave entitlement for exemption | 8 × 30 − 100 = 140 days → ₹3,73,333 |
| 10 months average salary | ₹8,00,000 |
| Exempt | ₹3,20,000 (all of it) |
Leave encashment is usually paid with gratuity in the full and final settlement. Estimate the other part with the gratuity calculator and read the detailed leave encashment guide for policy design tips.
Frequently asked questions
How is leave encashment calculated?
Most employers pay (basic + DA) ÷ 30 for each unused day, though some use 26 working days. Check your leave policy for the divisor and which components are included.
Is leave encashment taxable?
Encashment while you are still in service is fully taxable. At retirement or resignation, a non-government employee gets an exemption up to ₹25 lakh over their lifetime, subject to other limits.
What are the limits for exemption?
The exempt amount is the least of: the amount received, ₹25 lakh minus any exemption claimed earlier, 10 months of average salary, and the cash value of leave calculated at no more than 30 days for each completed year of service.
Is leave encashment paid on resignation?
Earned leave is usually encashed at exit as per company policy and state shops and establishments rules. Casual and sick leave are often not encashable.
Does the new tax regime allow this exemption?
Yes. The leave encashment exemption at retirement or resignation is available in both regimes.
