What is Leave Encashment?
Leave encashment refers to the amount of money an employee receives in exchange for unused earned/privilege leave, either at the time of retirement, resignation, or while in service (depending on company policy).
When can I receive leave encashment?
Leave encashment can be received:
- At the time of retirement
- Upon resignation or termination
- During employment (if allowed by employer policy)
How is leave encashment calculated?
It is usually calculated as:
- Leave Encashment = (Basic Salary + Dearness Allowance) × Number of Unused Earned Leaves ÷ 30
- Note: The divisor 30 assumes monthly salary is for 30 days.
Is leave encashment taxable?
Yes, it is taxable, but tax exemptions are available:
- For government employees, it is fully tax-exempt.
- For non-government employees, it is partially exempt under Section 10(10AA) of the Income Tax Act.
What is the tax exemption limit for leave encashment?
For non-government employees, the least of the following is exempt:
- Actual leave encashment received
- ₹3,00,000 (lifetime limit)
- 10 months’ average salary
- Cash equivalent of leave (max 30 days leave for every completed year of service)
What is considered 'salary' for leave encashment?
For tax exemption purposes, salary includes:
- Basic Pay
- Dearness Allowance (if part of retirement benefits)
- Commission (if based on a fixed % of turnover)
How many leaves can be encashed?
It depends on the employer’s policy. Commonly, up to 30 days per year of earned leave can be accumulated and encashed.
Can I use this calculator if I'm still employed?
Yes, if your employer allows in-service leave encashment, you can estimate the payout using this calculator. Tax rules may vary.
Do contractual employees get leave encashment?
Only if their contract or organization policy allows for it. It’s not mandatory under labor laws unless specified.
Does leave encashment apply to unused casual or sick leave?
Typically, only earned/privilege leave is eligible for encashment. Casual or sick leaves are not encashable unless the policy states otherwise
Do I need to submit any documents for tax exemption?
Yes, if you're claiming exemption during filing, you'll need to maintain proofs such as:
- Leave encashment statement from employer
- Salary slips
- Form 16 (for TDS verification)