Leave encashment is the payment an employee in India receives for unused earned leave, either during employment or when they leave the company. When an employee does not use all of their accrued leave, the balance can be converted into cash at their salary rate. It is most commonly paid out as part of the full and final settlement on exit, and it carries specific tax treatment that depends on whether the employee works in the government or private sector.
How does leave encashment work?
Encashment turns leave that has value into pay, based on the employee's salary and the number of unused days. A few principles apply in most cases.
- Earned leave only: usually only accrued earned or privilege leave is encashable, not casual or sick leave.
- Salary-based value: the payout is calculated on the employee's basic salary, sometimes with dearness allowance.
- Carry-forward limits: company policy and law cap how much leave can be carried over or encashed.
- Paid at exit: remaining balances are typically encashed in the full and final settlement when an employee leaves.
How is leave encashment taxed?
Tax treatment depends on when it is paid and the employee's sector. The broad position is as follows.
- During employment: encashment received while still employed is generally fully taxable.
- On retirement, government employees: leave encashment is generally exempt from tax.
- On exit, private employees: exemption applies up to a lifetime cap of 25,00,000 rupees (about 30,000 US dollars), with the balance taxable.
Leave encashment in the full and final settlement
On exit, leave encashment is one of several amounts brought together in the settlement. It sits alongside other dues, as the table shows.
| Component | What it covers |
|---|---|
| Unpaid salary | Days worked up to the last day |
| Leave encashment | Unused earned leave |
| Gratuity | If the service condition is met |
| Statutory bonus | If eligible and pending |
This information is for general guidance. Confirm current limits and consult tax experts for your specific situation.
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