In this post, we will discuss briefly on leave encashment, events under which you can encash leaves and tax computation. We will cover the following:

What is leave encashment?

During an employees’ service term, he / she can avail various leaves like earned leave, casual leave, gazetted leave, etc. There are some leaves which an employee can carry forward to the succeeding year. Also, some leaves cannot be carried forward for the next year like casual leave, compensatory leave, etc.

In case an employee does not avail the leaves allowed to him, he can encash these leaves and earn a salary for the number of days. This policy of the number of leaves allowed to be taken and leave encash varies from employer to employer.

When can an employee avail leave encashment?

  • During the tenure of the service
  • At the time of retirement
  • Termination of the service

Leave encashment calculation

There is no fixed rule as to how many leaves you can carry forward and how many leaves you can encash. Every company has its own rules. Here are some options used for leave encashment calculation:

  • Basic and Dearness Allowance is considered for calculation of the amount. A percentage of Basic+DA can be considered. For example, 10% of BAsic + DA
  • Per day salary can be considered. Here also we can consider all components or only Basic+DA.
  • A fixed rate can also be taken for encashment.

Tax Implication on Leave encashment

The taxability depends on if you are a government employee or a non-government employee.

During the tenure of the service

Leave Encashment during the tenure of the service is fully taxable in all cases, relief u/s 89 if applicable may be claimed for the same.

At the time of retirement

Government employee:  Encashment of unutilized earned leaves at the time of retirement is fully exempted from taxability.

Non-government employees: In case of non-govt employees the exemption is to be limited to the least of the following:

  1. Amount received as leave encashment
  2. The amount stated by the government i.e., Rs 3 Lakhs
  3. 10 months average basic salary & dearness allowance before leaving the job.
  4. Cash equivalent of the leave balance, subject to a maximum of 30 days for each completed year of service

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