The calculation
Encashment = days encashed × a day's pay
Policies define a day's pay in different ways. Most often it is basic (plus DA) ÷ 26 or ÷ 30, sometimes gross ÷ 26 or ÷ 30. Your policy decides; HR Bingo lets you choose.
Example
Basic ₹26,000, 10 days encashed, basic ÷ 26: 26,000 ÷ 26 × 10 = ₹10,000.
If the same policy used basic ÷ 30, the same 10 days would come to 26,000 ÷ 30 × 10 = about ₹8,667. The divisor changes the amount, so write it down in the policy.
Year end or on leaving
- At year end: many policies carry forward leave up to a cap, encash some, and let the rest lapse.
- On leaving: unused encashable leave is paid in the full and final settlement.
- Under the Occupational Safety, Health and Working Conditions Code, workers may also ask for unused annual leave to be encashed at the end of the calendar year.
Tax
Leave encashment received during service is taxable as salary. On retirement or leaving, private-sector employees can claim exemption up to ₹25 lakh over their career, subject to the conditions in the Income Tax Act.
Common mistakes
- Using a day rate that is not the one in the policy (basic or gross, ÷ 26 or ÷ 30).
- Paying the same encashed days twice, once at year end and again later.
- Treating encashment during service as tax-free. It is taxable as salary.
- Leaving the remaining encashable balance out of the full and final settlement.
How HR Bingo handles it
At year end, HR Bingo carries forward, encashes and lapses leave as per each leave type's caps. Encashed days are paid in the payroll month you choose, once. In full and final settlement, the remaining balance is encashed at your company's day rate.
Sources
Frequently asked questions
Is leave encashment calculated on basic or gross?
It depends on the company's policy. Basic (plus DA) is the most common; some companies use gross.
Is leave encashment taxable?
Yes during service. On retirement or resignation, private-sector employees can claim exemption up to ₹25 lakh in their lifetime, subject to conditions.
Is unused leave paid when an employee leaves?
Unused encashable leave is paid in the full and final settlement, at the day rate your policy sets.