Paid or earned leave is one of the employment perks offered to all the employees working for an organisation. Every employee is entitled to availing a certain number of paid leaves in a year (as per India’s labour law) which is also a part and parcel of the incentives offered by his/her employer. However, all these leaves may not be utilised in any given year. This is where the concept of leave encashment comes into play and helps employees look forward to the final settlement amount.
Here, we will encompass various sides of leave encashment in detail.
What is leave encashment?
Leave encashment refers to the process of encashing the leaves accrued by an employee to provide monetary benefits. Here, the employer is responsible for clearing the dues by adjusting the leaves as per the leave quota in a specific calendar year.
In simple words, leave encashment meaning implies that an employee can avail of the paid leave balance when he/she leaves the organisation, retires, or while continuing the service. In general, the encashment of earned leave is included in the Full and Final Settlement (FnF) performed by the companies at the time of resignation or termination of an employee.
More about the concept of encashing leaves
- Every salaried individual is entitled to a certain number of paid leaves given by his/her employer every year.
- Most employers allow their employees to carry forward unutilised paid leaves.
- The accumulated paid leave balance at the employees’ time of resignation or retirement makes the employer liable to compensate for these leaves as per the company’s policy.
- Leave encashment policy may vary from one company to another.
Types of leaves for employees
The following table covers different types of leaves that salaried individuals can avail of:
| Type of Leave | Description |
| Casual leaves |
|
| Privilege or earned leaves |
|
| Medical leaves |
|
| Holiday leaves |
|
| Sabbaticals |
|
| Maternity leaves |
|
Also Read: Gross Salary Meaning Simplified: Components, Calculation, and More
Is leave encashment taxable?
Leaves available for encashment during the employment period or at the time of retirement/resignation are fully taxable. The amount received by encashing the leaves forms a part of the income from salary. However, one can claim leave encashment exemption under Section 89 of the Income Tax Act.
Taxes related to leave encashment on retirement or resignation
Leave encashment on resignation or retirement is either partially or fully exempt based on the category an employee falls into. The related rules are detailed as follows:
| Types of employee | Leave encashment exemption |
| Central or state government employee | Fully exempt |
| Legal heirs of a deceased employee | Fully exempt |
| Non-government employee | Exempt as per the computation provided Section 10(10AA)(ii), which also includes the balance amount of taxable income from salary (if any) |
Leave encashment calculation – Illustration
Consider the following example to better understand the leave encashment calculation process –
Mr. Bose is retiring from his organisation after 15 years of continued service. He was entitled to receive 30 days of paid leave in a year from the company, which means he had 450 days of leaves during his entire service tenure.
Out of these leaves, Mr. Bose has utilised 100 days of paid leave and is left with 350 days of unutilised earned leave. As per the salary certificate, the sum of his basic salary and dearness allowance (DA) is Rs. 33,000 per month at the time of his retirement. Based on these details, his leave encashment will be calculated as follows:
| Particulars | Amount |
| Salary per day | 33,000/30 = Rs. 1100 |
| Leave encashment received | 1100 x 350 = Rs. 3,85,000 |
| Tax exemption: Least of the following | |
| Rs. 3,00,000 |
| Rs. 3,85,000 |
| 33,000 x 10 = Rs. 3,30,000 |
| 1100 x (30×15 – 100) = Rs. 3,85,000 |
| Taxable leave encashment | 3,85,000 – 3,00,000 = Rs. 85,000 |
Based on his/her salary, an individual can decide whether it is good to encash leaves every year or wait to receive a lumpsum amount at the time of resignation or retirement.
FAQs
Is leave salary and leave encashment the same thing?
Leave salary accumulated over time to be encashed later is a part of leave encashment.
What are the taxation rules related to leave encashment?
Leave encashment is taxable. However, the rules of taxation differ in terms of the terms/conditions defined by the employer and specific sectors an individual is employed in.
How is leave encashment calculated?
Leave encashment is calculated based on the nature of the job (government or non-government) and the total amount received from the employer. Consider the example above for more details.
Can leave encashment be withheld?
It can be withheld in case the assessee faces any departmental proceedings or criminal case during retirement.
Are casual leaves eligible for encashment?
This depends on the company’s policy, which may differ from one place to another.
