What is leave encashment?
Leave encashment is the monetary payment made to an employee in lieu of earned (privilege) leave that has accrued but not been taken. Many employers allow periodic encashment of leave above a certain balance during service, and most pay out the remaining accrued leave balance when an employee retires, resigns or is otherwise separated.
How it's calculated
Leave encashment amount is usually calculated as: (Basic salary + DA, if applicable) ÷ 30 (or the number of days in the month, per company policy) × number of unused leave days being encashed.
Worked example: an employee with a basic + DA of ₹30,000/month encashing 15 days of unused leave would receive roughly (₹30,000 ÷ 30) × 15 = ₹15,000, subject to the company's specific calculation policy.
Tax treatment
- Leave encashment received while still in service is fully taxable as salary income.
- Leave encashment received at the time of retirement or resignation is governed by Section 10(10AA) of the Income-tax Act: it is fully exempt for government employees, and exempt up to a government-notified limit for non-government employees, with the balance taxable.
Common mistakes
- Treating leave encashment at resignation as fully tax-exempt for private-sector employees without applying the Section 10(10AA) limit.
- Inconsistent leave-encashment formulas across pay cycles (using 26 vs 30 days as the divisor) causing payroll disputes.
- Not capping the number of encashable leave days per the company's own leave policy.
Sources
Last updated 2026-10-12.