Leave Encashment Meaning, Types, Calculation & Tax Rules

Leave encashment meaning refers to the monetary compensation given to an employee for any unused paid leave accrued during their tenure. Importantly, as per labor laws, employers grant salaried employees a specific number of paid vacation days annually, as defined by their employer.

Usually, in many organizations, employees can carry forward unused leaves to the next year, allowing them to accumulate a leave balance over time. In addition, by the time an employee exits the company, whether due to resignation or retirement, any remaining paid leave must be reimbursed. Employers provide a final payout for unused leave, known as leave encashment. Types of Leaves

Leave policies differ across organizations, but most companies offer a range of commonly recognized leave types. Therefore, below are some of the common leave categories provided by employers.

Types of Leaves

Casual Leave

Casual leave is granted for short-term personal needs. Typically, this ranges from 7 to 10 days per year. Henceforth, employees use these leaves for personal matters that require time off from work. Notably, the policy on encashment of casual leave differs from one organization to another, depending on their internal HR policies.

Earned leave

Employees often plan earned leave, also known as privilege leave, in advance and obtain prior approval from the concerned authority. Additionally, they accumulate these leaves over time and may encash them after meeting specific eligibility criteria. The leave encashment rules vary depending on the organization’s policies.

Medical Leave

Employers grant medical leave when an employee feels unwell and cannot carry out their work responsibilities. Specifically, this type of leave is intended to support health and recovery. The provisions for its encashment differ from one organization to another based on the organization’s policies.

Holiday Leave

Employers designate holiday leave as specific days off during the year when employees do not work, and they still receive their full salary. In general, the number and type of holidays offered can vary between organizations, depending on their policies and regional practices.

Maternity Leave

Generally, organizations grant maternity leave to pregnant female employees, ranging from 12 to 26 weeks, based on company policy and legal requirements. However, employees can also request additional time off beyond the standard leave period. Such extensions are generally unpaid and are not eligible for further extension beyond the approved duration.

Sabbatical Leave

Sabbaticals allow employees to take time off to enhance their skills and broaden their professional knowledge. Further, employees can use this period to pursue further education, attend training programs, or engage in personal development activities. Moreover, in some organizations, employers support or even reimburse these leaves, depending on the company’s policies.

Leave Encashment Calculation

The following formula determines the leave encashment amount:

Leave Encashment = (Daily Basic Salary) × (Total Unused Earned Leaves)

Frequently Asked Questions

Q1.	What is leave encashment?
Ans.	Leave encashment is the payment an employee receives for unused paid leave. In most organizations, employees are entitled to a set number of paid leaves each year. However, if they don’t use all of them, the remaining leave can be carried forward.
Q2.	What is the tax exemption limit for leave encashment?
Ans.	Leave encashment exemption as under Section 10AA of the Income Tax Act: For government employees, the tax on leave encashment received at retirement is fully tax-exempt. Non-government employees’ tax rules: leave encashment is tax-exempt up to ₹25,00,000 (lifetime limit), as per the Union Budget 2024-25. Any amount above this limit is taxable.
Q3.	Can I encash earned or casual leave?
Ans.	Yes, you can encash earned leave, as many organizations allow it either during employment or at the time of exit. However, casual leave is usually meant for short-term personal use and is not usually eligible for encashment. Therefore, the final decision depends on your company’s leave policy.
Q4.	Is leave encashment compulsory by law?
Ans.	No, leave encashment is not compulsory by law under Indian labor laws. Although employees are entitled to paid leave, the employer decides whether they can encash unused leave or carry it forward to the following year.
Q5.	When is leave encashment paid?
Ans.	Generally, employers usually pay paid leave encashment at the time of retirement, resignation, or according to company policy during employment (mainly for earned leave).