Leave & Benefits
Leave Encashment in India: Rules, Formula & Tax Guide (2025)
Unused earned leave can translate to a meaningful payout at resignation or retirement. The Budget 2023 revised the tax-free limit to ₹25 lakh — here’s everything you need to know.
What is Leave Encashment?
Leave encashment is payment received in lieu of earned (privilege) leave that was not availed. Most companies accumulate earned leave at 1–1.5 days per month (12–18 days/year), subject to a maximum carryforward limit (typically 45–90 days).
Which Leave Can Be Encashed?
| Leave Type | Encashable? | Quantum |
|---|---|---|
| Earned / Privilege Leave (EL/PL) | ✓ Yes — on exit or during service | 15–21 days/year |
| Casual Leave (CL) | ✗ No — lapses at year-end | 7–12 days/year |
| Sick Leave (SL) | ✗ Rarely (some companies allow on retirement) | 7–12 days/year |
Leave Encashment Calculation Formula
Leave Encashment = (Basic Salary + DA) ÷ 26 × Number of Earned Leave Days
The divisor is 26 working days per month (same as gratuity). Some companies use 30 — check your appointment letter or HR policy.
Example
| Item | Value |
|---|---|
| Basic Salary | Free |
| Dearness Allowance | ₹0 (private sector) |
| Accumulated Earned Leave | 60 days |
| Leave Encashment | 45,000 ÷ 26 × 60 = ₹1,03,846 |
Tax Treatment of Leave Encashment
| Scenario | Tax Treatment |
|---|---|
| Encashment during service (employer-forced or voluntary) | Fully taxable in year of receipt |
| Retirement — Government employees | Fully exempt, no limit |
| Retirement — Private sector employees | Exempt up to ₹25,00,000 (Budget 2023) |
| Resignation — Private sector | Partially exempt; minimum of formula value or ₹25L limit |
Budget 2023: ₹25 Lakh ExemptionThe non-government employee leave encashment exemption was revised from ₹3 lakh to ₹25 lakh at retirement — a significant 8x increase benefiting employees with large accumulated leave balances.
Company Policy Points to Check
- Maximum accumulation cap — days beyond the cap lapse automatically
- Annual encashment option — some companies offer a once-a-year partial encashment window
- Resignation vs retirement rate — some policies pay lower encashment on resignation
- Probation period — leave often does not accrue during probation
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⇓ Create Free Payslip →Frequently Asked Questions
Encashment during service is fully taxable. At retirement, private sector employees get an exemption up to ₹25 lakh (revised in Budget 2023). Government employees are fully exempt at retirement.
Only Earned (Privilege) Leave can be encashed. Casual Leave and Sick Leave typically cannot be encashed and lapse at year-end or on exit.
(Basic + DA) ÷ 26 × Number of Earned Leave Days. Some companies use 30 as the divisor — check your HR policy or appointment letter.
No. You are entitled to encashment of accumulated earned leave on resignation. Some companies cap the number of days or pay at a reduced rate compared to retirement.
No, not as a regular item. It appears on your full-and-final settlement payslip or during company-wide encashment exercises.