Did you know that the money you receive for unused leave could be partially tax-free? Leave encashment is a valuable perk provided by employers, but many employees are unsure about its rules and tax exemptions.
Understanding how it works can help you make the most of this benefit. Whether you work in the private or public sector, knowing the calculation formula, tax-free limits, and other key details can save you money and hassle.
In this blog, we’ll explain everything about leave encashment in simple terms so you can manage your finances better.
What is Leave Encashment?
Let’s start with leave encashment meaning.
Under labour laws, salaried employees are entitled to a certain number of paid leave annually. The unused leave can often be carried forward.
So, basically, leave encashment is a benefit where employees are paid for their unused or accumulated paid leave days.
- It usually happens during resignation, retirement, or termination of employment.
- This benefit is common in both government and private sector jobs.
- The amount you get depends on your salary and the number of unused leave days.
- It is important to know that this payment might be taxable – with some exemptions based on rules.
Leave Encashment Policy in India
In India, leave encashment policies vary by employer, but they are generally governed by labour laws and company guidelines. The encashment amount is usually calculated based on the employee’s daily salary (basic pay + dearness allowance) and the number of unused leave days. Tax exemptions may apply depending on the amount and the employee’s tenure.
What are the Different Types of Leaves?
Organizations provide various types of leaves to meet the diverse needs of their employees. Below is a summary of the common leave types and the leaves that can be encashed.
| Leave Type | Description | Eligibility for Encashment |
| Casual Leave | Short-term leave for personal reasons, usually 7-10 days | Eligibility depends on company policy |
| Medical/Sick Leave | Leave for health-related issues; duration varies by company | Eligible, except for long-term cases |
| Privilege/Earned Leave | Leave earned over time; requires prior notice | Typically eligible as per policy |
| Holiday Leaves | Paid leaves granted for public holidays or company-declared holidays | Generally eligible |
| Sabbaticals | Extended leave for upskilling or personal development, often reimbursed by the employer | Usually eligible |
| Maternity Leave | Leave for pregnant employees, lasting 12-26 weeks | Not eligible for encashment |
| Compensatory Leave/Comp Off | Leave granted in exchange for working extra hours or holidays | Not eligible |
| Floater Leave | Short-term leave on a specific day of the employee’s choice, subject to approval | Eligibility varies by policy |
| National Holiday | Leave provided for observing national events | Not eligible |
| Marriage Leave | Paid leave specifically for employees getting married | Not eligible |
| Unpaid Leave | Leave taken without pay for personal or professional reasons | Not eligible |
Leave Encashment Rules
Let’s take a look at the key rules and details regarding leave encashment in India.
- Leave encashment during service is fully taxable, but Section 89 relief is available.
- Leave encashment on resignation or retirement is fully exempt for government employees.
- For private employees, exemptions are capped at ₹25 lakhs under Section 10(10AA).
- Tax relief for legal heirs is complete, with no tax deduction applicable.
- Employees should use Form 10E to claim relief for leave encashment under Section 89.
Eligibility for Leave Encashment
- Employees are generally entitled to encash leave that remains unused at the time of resignation, retirement, or termination.
- Some companies allow encashment of leave during the employment, though the rules may differ from one organization to another.
- Only certain types of leave (like casual, privilege, and earned leave) are eligible for encashment. Maternity leave, national holidays, and unpaid leave are usually not eligible.
Also Read - Privilege Leave: Meaning, Calculation, Encashment Rules in India
Employer Discretion
- Companies may have different policies regarding the encashment of leaves during employment, with some allowing encashment of leave at regular intervals (e.g., annually).
- The employer can choose to set a cap on the number of leave days that can be encashed in a given year.
Is Leave Encashment Taxable?
Yes, leave encashment is taxable depending on when it is received:
During Service: Fully taxable and treated as part of “Income from Salary.”
On Resignation or Retirement: Taxable, but exemptions apply under Section 10(10AA).
Taxation of Leave Encashment
Now, let’s understand taxation of leave encashment during employment and after retirement or resignation.
Encashment of Earned Leave during Employment Period
Let’s understand earned leave encashment rules. So, basically, leave encashment received while still employed is fully taxable in India and is classified under “income from salary.”
However, relief under Section 89 of the Income Tax Act, 1961, can help lower the tax burden.
Taxability
The entire leave encashment amount is added to your income and taxed according to your applicable tax slab.
Notably, no exemptions are provided under Section 10(10AA) for leave encashment during employment.
Tax Relief Under Section 89
Relief under Section 89 of Income Tax Act leave encashment can reduce tax liability if the following conditions are met:
- Minimum Service: You must have completed at least five continuous years with the same employer before receiving the leave encashment.
- Encashment Limit: The leave encashment cannot exceed the salary for the month in which it is received.
Steps to Claim Tax Relief
To avail of the tax benefits under Section 89, you need to follow these steps:
- Fill out Form 10E, which is available on the official e-filing portal of the Income Tax Department.
- Submit the completed Form 10E along with your income tax return.
Also Read - Monthly Salary Slip Format and Samples for Employees and Employers
Leave Encashment on Resignation or Retirement
The tax treatment of leave encashment on retirement or resignation in India varies based on whether you are employed in the government or private sector.
Leave Encashment on Retirement for Government Employees
Leave encashment received (by central or state government employees) at the time of retirement or resignation is fully exempt from income tax – irrespective of the amount.
In the event of the employee’s death, the legal heirs can claim the full leave encashment amount – which is also entirely tax-exempt.
Leave Encashment Rules for Private Company
For private sector employees, leave encashment is partially exempt from tax. The exemptions are determined as per Section 10(10AA) of the Income Tax Act.
- Exemption limit: As of Budget 2023-24, the maximum exemption allowed is ₹25 lakhs. Previously, this limit was ₹3 lakhs.
- Taxable portion: Any amount received beyond the exempt limit is taxable and will be added to your income – with tax applied as per the applicable income tax slab.
Leave Encashment Tax Exemption Under Section 10(10AA)
Did you know? Section 10(10AA) provides leave encashment exemption under specific conditions – varying based on employment type.
Here is a table summarizing the exemption of tax on leave encashment.
| Category | Tax Treatment |
| State and Central Government Employees | Fully tax-exempt. |
| Private Sector Employees | Partially exempt under Section 10(10AA)(ii); remainder taxable. |
| Legal Heirs of Deceased Employees | Fully tax-exempt on the amount received. |
How Much Leave Encashment is Tax Free?
For private employees, the maximum leave encashment exemption limit is ₹25 lakhs – received upon resignation or retirement. For government employees, the entire amount is tax-free.
Leave Encashment Exemption in New Tax Regime
The exemption limit of ₹25 lakhs for private employees applies in both the old and new tax regimes. However, tax benefits under Section 89 are only applicable in the old tax regime.
Section 10 10AA of Income Tax Act Leave Encashment
Section 10(10AA) provides tax exemptions for leave encashment received on retirement or resignation. For private employees, the exemption amount is calculated based on the least of the four factors mentioned below:
- Actual leave encashment amount received.
- Average salary for the last 10 months (including basic pay, dearness allowance, and commission).
- Cash equivalent of unutilized earned leave (limited to 30 days per year of service).
- The prescribed limit of ₹25 lakhs as per the Finance Budget 2023-24 (earlier ₹3 lakhs).
Resignation or Termination
Leave encashment received on resignation or termination is treated as part of salary income and taxed according to the applicable slab rates for both government and private employees.
Special Cases
Leave Encashment for Legal Heirs
In the event of an employee’s death, any leave encashment received by their legal heirs is fully tax-exempt.
CBDT Leave Encashment Limit
The Central Board of Direct Taxes (CBDT) increased the leave encashment limit for private employees from ₹3 lakhs to ₹25 lakhs in the Finance Budget 2023-24.
Leave Encashment Exemption Limit for AY 2024-25
For Assessment Year 2024-25:
- Government employees enjoy full tax exemption on leave encashment at retirement.
- Private employees can claim an exemption up to ₹25 lakhs.
Leave Encashment Calculation in India
Calculating leave encashment can seem tricky, but it’s straightforward once you understand the formula.
Leave Encashment Formula
The basic formula for leave encashment calculation is:
[(Average Basic Salary + Average Dearness Allowance) / 30] × Number of Earned Leaves
Here’s a breakdown:
- Average Basic Salary: The average basic pay received on a monthly basis.
- Average Dearness Allowance (DA): The average monthly dearness allowance.
- Number of Earned Leaves: The total accumulated earned leave balance eligible for encashment.
This calculation provides the amount payable to employees for unused leaves.
Now, if you are wondering how to calculate leave encashment – just follow this example.
Example
Neha has been working at ABC Ltd. for 15 years and is entitled to 30 days of annual leave. Her monthly salary, including Dearness Allowance, is ₹60,000. Neha used 150 days of leave during her career and accumulated the remaining leaves.
Calculation of Leave Encashment:
- Total leave entitlement over 15 years: 15 years × 30 days/year = 450 days
- Accumulated Leaves (Earned Leaves): 450 days − 150 days = 300 days
- Per Day Salary: ₹60,000 / 30 = ₹2,000
- Leave Encashment Amount: ₹2,000 × 300 = ₹6,00,000
In this case, Neha’s leave encashment of ₹6,00,000 exceeds ₹3,00,000, so only ₹3,00,000 will be exempt from tax. The remaining ₹3,00,000 will be taxable.
For tax exemption under Section 10(10AA), the least of the following will apply:
- Actual leave encashment received: ₹6,00,000
- Average salary for the last 10 months: ₹60,000 × 10 = ₹6,00,000
- Leave entitlement limit (30 days per year × 15 years): ₹9,00,000
- Maximum exemption allowed: ₹25,00,000
Exempt amount: Lower of all values = ₹6,00,000
Thus, taxable leave encashment = ₹6,00,000 − ₹6,00,000 = ₹0 (no tax payable on this amount).
In this case, Neha’s entire leave encashment of ₹6,00,000 is exempt from tax.
Leave Encashment on Basic or Gross
- Basic Salary: Most private companies calculate leave encashment only on the basic pay and dearness allowance, excluding allowances like HRA, bonuses, or incentives.
- Gross Salary: In rare cases, leave encashment includes gross salary, but this is subject to the company’s policy.
Leave Encashment Formula in Excel
To calculate in Excel, you can use this formula:
= (Basic_Salary + DA) * Unused_Leave * (1/30)
Simply input your salary and leave details into the respective cells, and the formula will provide the encashment amount.
Leave Encashment Calculation Formula for Private Company
For private companies, leave encashment is calculated as per their internal policies, typically based on basic salary and a prescribed formula. For tax exemption purposes, refer to Section 10(10AA) of the Income Tax Act.
Latest Supreme Court Judgement on Leave Encashment
In a recent judgment, the Supreme Court reaffirmed that leave encashment is a part of an employee’s salary. The Court emphasized that once leave encashment is earned, it becomes the employee’s property. Any attempt to deny leave encashment without legal backing violates constitutional rights.
Leave Encashment Application
A leave encashment application is a formal request made by employees to receive payment for accumulated leaves, either during employment or upon retirement.
To apply for leave encashment:
- Get the leave encashment form from HR.
- Fill out the form with details like leave balance and salary.
- Attach documents such as leave balance statement or LTC proof.
- Submit the form to HR for processing.
- Wait for approval and payment to be credited.
Make sure to follow the guidelines for leave encashment on LTC if applicable.
Also Read - Leave Application for Festival in Office with Format & Samples (2025)
Process of Leave Encashment
Leave encashment lets employees convert unused paid leave into cash. While the process can vary by company, here’s a simple breakdown.
- Accumulation of leaves: Employees accumulate unused leave days, which are eligible for encashment.
- Request submission: The employee submits a request, either through a form or writing to HR.
- Calculation and approval: HR calculates the encashment amount, usually by multiplying the daily salary (basic pay + dearness allowance) with the number of days. Approval may be needed from the manager or HR.
- Payment: Once approved, the encashed amount is paid, either in the final salary or separately. Taxes are deducted if applicable.
Accenture Leave Encashment
Leave encashment in Accenture is calculated using this formula:
(Fixed Salary / 2350) * Number of paid leave hours (up to 270)
For example, if your CTC is ₹8 LPA, with ₹6 Lakh as fixed salary and ₹2 Lakh as variable:
- Variable portion: ₹2,00,000
- Applying the formula: (6,00,000 / 2350) * 100 = ₹25,532.
This is the leave encashment amount for 100 hours of paid leave.
TCS Earned Leave Encashment
At Tata Consultancy Services (TCS), employees up to the C3B grade can encash earned leaves. Employees receive 16 earned leaves annually – which accumulate up to 48 days. To calculate the encashment, multiply the basic salary by 22, then by the number of earned leaves.
To apply for earned leave encashment in TCS, employees must submit a written request to HR or complete a form. After the C3B grade, unused leaves expire at the end of the financial year.
Wrapping Up
And that’s all you need to know about leave encashment in India. Whether you’re a government or private-sector employee, understanding the tax exemptions, limits, and calculation formulas can help you maximize your benefits.
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FAQs
Is there a Leave Encashment Act 1948?
There is no specific “Leave Encashment Act 1948.” Leave encashment is governed by various employment rules and tax provisions.
What are the leave encashment rules for central government employees?
Central government employees get leave encashment upon retirement or resignation based on their basic salary and accumulated earned leaves.
What are 10 days leave encashment rules?
Employees can encash up to 10 days of earned leave, depending on their organization’s policies.
Is leave encashment calculation 26 days or 30 days?
Leave encashment is typically calculated on a 30-day basis, not 26 days unless specified differently by the employer’s policy.
What are the DOPT orders on leave encashment on LTC?
The Department of Personnel and Training (DOPT) issues orders regarding leave encashment on Leave Travel Concession (LTC). According to these orders, employees can encash earned leaves when they are unable to avail LTC, provided the guidelines are followed.
Also Read - LTA (Leave Travel Allowance) in Salary – Calculation, Exemption & More (2025)
How to submit an application for LTC leave encashment?
To apply for LTC leave encashment, employees must submit a formal request along with the required documentation to HR or the relevant department.
Is leave encashment taxable on resignation?
Yes, leave encashment is taxable on resignation, based on your income tax slab, with exemptions for government employees.
What is surrender leave encashment?
Surrender leave encashment refers to the process of voluntarily giving up earned leave for monetary compensation.
What is the difference between gratuity and leave encashment?
Gratuity is a lump sum payment given to an employee upon retirement, resignation, or death after a minimum of five years of service. Leave encashment, on the other hand, is the monetary compensation for unused earned leaves.
What is the leave encashment exemption section?
Leave encashment exemption is covered under Section 10(10AA) of the Income Tax Act.