Leave Encashment

Every salaried person as per labour law is

entitled to a minimum number of paid leave
every year. However, it is not necessary that
an individual employee utilises all the leave he
is entitled for a year. In fact, most employers
allow the employees an option of carrying
forward such unutilised paid leaves.
This would invariably leave the employee with
an accumulated unutilised leave balance at
the time of retirement or resignation from the
company as the case may be. This compels the
employer to compensate the unutilised paid
leave of the employees. This concept is better
known as leave encashment.
 Leave encashment received during service

Accumulated leave can either be encashed

during service or at the time of retirement or
resignation. Any leave encashed during service
is fully taxable and forms part of ‘income from
Salary’. 
 Leave encashed at the time of retirement or resignation

Leave encashment received at the time of either

retirement or resignation is either fully or
partially exempt depending upon the category
that an employee falls under.
• Leave encashment received by Central or State
Government employee at the time of
 retirement or resignation is fully exempt
• Leave encashment received by legal heirs of
deceased employee is fully exempt
• Leave encashment received by Non-Government
employee is exempt based on the computation
provided under Section 10(10AA)(ii) and balance
amount if any is taxable as ‘income from salary’
Salary for this purpose includes basic salary,
dearness allowance and commission based on
fixed percentage of turnover secured by
employee** Specified amount of Rs 3,00,000
is the aggregate amount allowed as
exemption irrespective of frequency of leave
encashment received by employee by various
employers. 
Mr A is retiring after 15.5 years of service.
Mr A was entitled to 35 days of paid leave per annum
from his employer i.e., overall 542 days of leave during
his entire service.
Out of the same Mr A has already utilised 200 days of
paid leave and is left with 342 days of unutilised leave.
Mr A was drawing basic salary + DA of Rs 33,000 per
month at the time of retirement and received Rs
3,76,750 as leave encashment calculated based on 342
days * Rs. 1,100 (salary per day = Rs.33,000/30 days).