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All-in-one HR platform · v2.0
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All-in-one HR platform · v2.0
14-day free trial · No credit cardhello@HrMagix.com
Payment for earned leave that has not been taken, either during service where the policy allows or on separation. It is computed on the wage the policy or applicable law specifies, typically basic plus DA, and on exit its tax treatment is governed by Section 10(10AA) of the Income-tax Act.
Encashment comes up in two situations. Some companies allow employees to encash part of their earned leave balance once a year, often in a fixed month, and nearly all pay out the unused encashable balance at exit as part of full and final settlement.
Example with illustrative figures: an employee with basic and DA of ₹30,000 leaves with 20 days of encashable leave. If the policy divides by 30, the payout is ₹30,000 ÷ 30 × 20, or ₹20,000. A policy that uses 26 working days as the divisor gives a higher amount, so the divisor must be written down.
Encashment during service is fully taxable. At retirement or resignation, an exemption may apply subject to limits that depend on current tax rules, so payroll should confirm the limit in force before computing TDS. The common mistake is encashing sick or casual leave the policy never made encashable.
Usually as unused eligible leave days multiplied by a daily rate, often based on basic plus DA divided by the days the policy specifies. The policy must state the wage base and divisor.
Encashment during service is fully taxable. On retirement or resignation, a portion may be exempt under section 10(10AA) up to a limit set by the government.
Usually only earned or privilege leave. Casual and sick leave typically lapse, though the company policy and any state rules decide.
Yes, unused encashable leave is normally paid in the final settlement. State Shops and Establishments rules may require it, and these vary by state.
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